In [1] we considered a simple way to hedge crypto investments from loses, by using put options. There are some inconveniences with this method. The first inconvenience is that options have expiration dates, therefore to support hedging positions investors need to buy new put options. The second inconvenience is that options are specific to each crypto exchange.
In this post we consider a new method of hedging bitcoin investments using inverse bitcoin ETFs. See [3]. These financial instruments correlate negatively with bitcoin prices and they do not have the inconveniences of the previous method. Inverse ETFs are classified as securities, therefore you can buy them via any stock broker.
Let us consider some examples. On October 27, 2022 Tom bought 1 bitcoin for $20,185.84 believing that BTC will go up. Jane also bought 1 bitcoin for $20,185.84 believing that BTC will go up, but she also considered a case that BTC may go down in value. To hedge this risk she also bough inverse ETF (BITI) 566 contracts valued in total $20,166.58 (each for $35.63).
On November 9, 2023 BTC declined to $15,880.78. Afraid to loose even more, Tom closed his position in BTC, which resulted in loses of $4,305.06 (=$20,185.84-$15,880.78).
Jane also had loses on her BTC position, but she had positive gains on her BITI position. The total value of her portfolio (BTC+BITI) has positive gain of $1,185.14. She closed BITI position on November 9, 2023 with realized gains of $5,490.2. Now, she still has 1 bitcoin and additional $5,490.2.
P.S. Fees and transaction costs are not included in the examples above.
References
[1] A simple way to make money when values of cryptos go down
[2] A simple way to increase your income when values of crypto go up.
[3] BITI prices
https://finance.yahoo.com/quote/BITI/history?p=BITI
