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The possibility of a spot Bitcoin (BTC-USD) ETF in the United States has justifiably commanded quite a bit of attention in the headlines for much of the second half of 2023. This excitement has helped push the price of BTC up from the mid-$20k range to over $37k as of article submission:
To my surprise, most of the Bitcoin mining names have been completely unresponsive to this 50% surge in BTC since mid-September. However, we have seen a significant closing of the NAV discount in the Grayscale Bitcoin Trust (OTC:GBTC) shares over the last several months. With Bitcoin bulls potentially looking for Bitcoin-proxy ideas that can be expressed in traditional investment accounts like IRAs, one may consider buying the Volatility Shares 2x Bitcoin Strategy ETF (BATS:BITX). In this article, we’ll look at how that fund works and determine if it’s something investors should consider holding.
How BITX Works
Like other leveraged ETFs, BITX intends to maximize the returns from a single investment theme; in this case, long Bitcoin. As a 2x ETF, BITX is designed to double the return of Bitcoin in a single trading session. If Bitcoin increases by 2% in a day, BITX should increase by 4% if the fund performs as intended.
The Volatility Shares 2x Bitcoin Strategy ETF does not directly invest in Bitcoin. Because there is no Bitcoin underlying the shares, you could argue BITX is structurally more similar to the ProShares Bitcoin Strategy ETF (BITO) than it is to something like GBTC. The relationship between BITX shares and Bitcoin comes from the CME Bitcoin futures contracts held in the fund rather than from direct exposure to the underlying asset.
BITX Holdings (Volatility Shares)
Similar to the ProShares fund, BITX is primarily focused on the front end months and utilizes leverage to outperform both Bitcoin and BITO on the way up. Of course, this also works against the investor on the way down and when BTC is losing against the dollar, BITX should go down twice as much.
Fund Performance
In a sampling of recent sessions, we can see examples of the fund delivering on the 2x return and examples of the fund returning far more than two times that of Bitcoin:
| Daily Return | BTC | BITX |
|---|---|---|
| 11/13/23 | -1.65% | -3.18% |
| 11/14/23 | -2.53% | -9.38% |
| 11/15/23 | 6.56% | 14.61% |
| 11/16/23 | -4.55% | -9.18% |
| 11/17/23 | 1.30% | 2.87% |
| 11/20/23 | 0.23% | 6.61% |
| 11/21/23 | -4.60% | -3.73% |
| 11/22/23 | 4.68% | 3.92% |
| 11/24/23 | 1.18% | 1.16% |
Source: TradingView, daily closes
These are very large intraday moves and I think speak to the high degree of risk involved in holding leveraged shares. It’s also important to note that Bitcoin trading is 24/7 while BITX only trades during regular market hours. Given that, it’s not surprising to see large fluctuations between the fund shares and BTC day to day. However, this is just a two week sample of intraday moves. The longer term performance of the fund shares is telling.
Over the course of several months, BITX has actually held up okay. For instance, since mid-September when Bitcoin last touched $25k, the price of BTC is up 45% while BITX shares are up over 117%:
Not only has BITX outperformed the “2x” goal since mid-September, but the fund has also outperformed the top two mining stocks in the equity markets as well. However, over the long haul leveraged ETFs are generally awful investments and despite its minimal trading history, I suspect BITX won’t be much different. Consider total performance since the inception of the fund:
Since the fund’s inception on June 27th, the total return from holding the 2X Bitcoin shares is a hair under 30%. While that may be ahead of Bitcoin’s 24% total return over the same timeframe, it’s a far cry from the 2X return that the fund strives for. And this gets us back to the major risk when holding funds like this.
Risks
Since the futures contracts underlying these shares are cash-settled and rolled over, the issuer never actually holds any BTC in the fund. Due in part to that constant rollover, fees for BITX do cut into the total return. The expense ratio is 1.85% – this is double that of BITO despite the collateral essentially being the same thing.
As a leveraged ETF, the fund will decay over time given rebalancing and the expenses just mentioned. In my view BITX should really be used more as a very short term trading vehicle for experienced market participants rather than as a long term investment holding.
Interestingly, MicroStrategy (MSTR) has outperformed both Bitcoin and BITX since the inception of the Volatility Shares 2x Bitcoin Strategy ETF. And this isn’t even a cherry-picked starting point. It checks out longer term as well with MSTR outperforming BTC by better than 2 to 1 year to date:
From a fundamental business standpoint, I don’t see much reason to hold MSTR shares. But given the leverage on Bitcoin with the corporate balance sheet, MicroStrategy equity may be a better alternative to BITX for investors who want higher upside with a more long term bullish Bitcoin theme.
Summary
I absolutely understand the allure of BITX and can empathize with traders who would look to those shares for boosted returns over simply buying and holding BTC. As someone who likes a few of the miners for the very same reason, I understand the goal. However, I think there are better ways to look for upside against Bitcoin in a broader BTC bull run.
The only place I would even entertain BITX would be in a tax-advantaged account like an IRA. In a typical brokerage, I’d say avoid it entirely. My rationale there is cryptocurrencies are a 24/7 market and proxies that live in regular market hours leave quite a bit of tactical trading utility on the table. I don’t personally hold or trade BITX and can’t recommend it as a long term investment. Furthermore, MSTR is acting like a 2x ETF better than BITX is. So take that for what it’s worth.
