Defiance introduces ETFs with simultaneous long, short positions on Bitcoin, Ethereum and gold

Defiance ETFs has filed for regulatory approval of four new exchange-traded funds (ETFs), some of which include simultaneous long Bitcoin (BTC) and short Ethereum (ETH). 

A May 6 filing with the US Securities and Exchange Commission (SEC) revealed the funds, which include the Bitcoin vs. Ethereum ETF, which is long BTC and short ETH; the Ethereum vs. Bitcoin ETF, which is long ETH and short BTC; the Bitcoin vs. Gold ETF, which is long BTC and short gold; and the Gold vs. Bitcoin ETF, which is long gold and short BTC.

Under the BattleShares label, the filing structures each fund to track the leveraged performance of one asset versus another using derivatives. Each fund is actively managed and seeks total return through synthetic exposure to the underlying assets.

Target exposure typically ranges from +150% to +220% for long positions and -150% to -220% for short positions.

Bitcoins Synthetic exposure to long Bitcoin, short Ethereum

Rather than holding spot assets, the funds establish leveraged exposure using a combination of futures contracts, swaps, options, and US-listed ETFs or exchange-traded products (ETPs).

According to the prospectus, the structure of ETFs aims to take advantage of price differentials between long and short asset pairs. 

The investment thesis behind the Bitcoin vs. Ether ETF is to generate returns when Bitcoin outperforms Ether over the holding period. Conversely, the Ether vs. Bitcoin ETF is for investors anticipating stronger performance from Ether.

None of the ETFs invest directly in the assets they track. Instead, they gain exposure using financial instruments issued by other funds or derivatives markets. 

Where necessary, up to 25% of assets may be allocated to a Cayman Islands subsidiary to maintain favorable US tax treatment under Regulated Investment Company (RIC) rules.

The filing adds that the derivative structure allows the funds to avoid custody risks associated with direct holdings of digital assets or physical gold. 

Still, this structure introduces additional complexity, including exposure to counterparty risk, tax constraints, and high turnover due to frequent rebalancing.

Bitcoins High-turnover strategy and operational design

The funds are designed to be non-diversified and will have high portfolio turnover due to frequent rebalancing driven by market volatility, asset momentum, and derivative expiration cycles. 

The strategy involves continuously adjusting exposure to maintain target leverage and balance between the paired long and short positions.

Due to leverage, investors may see amplified gains or losses relative to the underlying asset movements. The product documentation notes that performance is based on relative, not absolute, asset values, making the ETFs unsuitable for directional exposure to a single asset.

The year-to-date performance of the “long Bitcoin, short Ethereum” strategy would be highly profitable for investors. As of press time, BTC is up by 1%, while ETH is down by nearly 47% in the same period.

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