How to Short Bitcoin Using an ETF

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Bitcoin’s recent stratospheric rise in price has left just about everyone wondering how they can short Bitcoin, or bet against, the cryptocurrency.

Key Points

  • Don’t short bitcoin directly with an unregulated exchange
  • Short GBTC which tracks the price of bitcoin – shorting GBTC = shorting bitcoin
  • Ally Invest is one of the only brokers to let their clients trade GBTC
  • Take advantage of GBTC’s 70x NAV premium to BTC

How to Short Bitcoin in a Brokerage Account

Currently, the best way to short BTC is through an online brokerage account.

Setting up a digital wallet and trading on an unregulated exchange has a steep learning curve and it’s just not necessary.

Ally Invest is one of the few brokerages that let clients buy and sell GBTC. Betting against bitcoin via depositing money with a digital wallet cryptocurrency broker is not insured and not secured. All deposits with US stock brokers are FDIC insured up to $250,000, so there is no possibility of losing your money if your broker goes under. This is not the case with unregulated cryptocurrency brokers. Plus, most crypto brokers and exchanges charge HUGE transaction fees. Shorting GBTC is cheaper, safer, and arguably more potentially lucrative due to the NAV premium of GBTC.

What is GBTC?

GBTC is an ETF (exchange traded fund) that mimics the price of Bitcoin. It stands for the Grayscale Bitcoin Investment Trust, and it can be bought and sold directly like a stock.

The reason Ally Invest is so fantastic for trading GBTC is because they are offering free trades for 90 days with qualifying deposits! This means you don’t have to pay any conversion fees or other nonsense charges with cryptocurrency brokers and can literally bet on the price of bitcoin for free.

Is it possible to short Bitcoin?

The simple answer is YES.  Although it is possible to short the bitcoin directly via a bitcoin exchange, it’s not easy. Plus, all bitcoin exchanges are, at the moment, unregulated.

Because blockchain technology and bitcoin haven’t gone mainstream just yet, if you want to short bitcoin directly, you’ll have to deposit your money with an unregulated broker – this is rightfully scary.

Although this is the most direct method to short bitcoin, it is not the easiest nor is it the safest. It’s often difficult to find enough GBTC available to borrow to sell it short. Remember, shorting means one sells something that they do not own, so it must first be borrowed.

What to Know About GBTC before you Dive Head First:

  • GBTC is an exchange traded fund that solely holds BTC, so it’s price is directly correlated to BTC’s performance
  • However, GTBC can be up or down more than BTC because it often trades at a premium to NAV (net asset value) of Bitcoin
  • There is an anual management fee of 2% for holding GBTC
  • GBTC’s holdings are not insured, so a glitch or cyber attack could theoretically bring the ETF to zero (this is good for shorts)

Shorting Bitcoin using GBTC

GBTC is pretty much the go-to Bitcoin ETF. It recently came under fire from notable short seller Andrew Left from Citron Research who pointed out several flaws. Namely, GBTC trades at a 70% premium to the NAV of it’s holdings, which are around 170,000 Bitcoins.

To put this in perspective, GLD, which is a popular ETF that allows investors to buy and sell gold without actually having to buy physical bullion, coins, or futures, trades at a premium of just 0.0028% to the NAV of it’s holdings.

This mind-boggling premium that GBTC trades at has drawn sharp criticism by short sellers. If you wish to hold GBTC as a long position, you must be aware of the fact that is both uninsured (because Bitcoins cannot be insured at the moment) and it is trading at a HUGE premium to Bitcoin.

For those looking to short Bitcoin, GBTC is Perfect

Chart showing the amazing 1year rise of GBTC

Credit: Bloomberg L.P.

GBTC certainly appears to be inherently flawed. The lack of custodian insurance and significant premium to NAV are concerning to say the least.

 

GBTC recently underwent a 90:1 reverse split, so instead of trading in the thousands, it’s not trading in the teens. The value has not changed at all, only the price; the security is still the same. It is important to note that the reverse split did NOT affect the value of GBTC; more shares of GBTC were created and the price was lowered.

With that said, shorting GBTC is a two-for-one trade. It not only allows traders to short bitcoin without having to setup a digital currency wallet and navigate a steep learning curve, but it also takes advantage of an absurd 70x price-to-NAV ratio.

Final Thoughts

And if you’re going to trade GBTC, there is seriously no better broker than Ally Invest. There pricing of $3.95 for ETF and stock trades is one of the the lowest rates in the industry. Plus, like all online stock and options brokers in the United States, Ally is FDIC insured up to $250,000 and is one of the top-rated online discount brokers in the country.

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