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Defiance’s IBIT Allows Investors to Participate in or Hedge Crypto Downside Risk

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Defiance ETFs create unique, transparent, portfolio-based products linked to disruptive technologies – including 5G, quantum computing and hydrogen – that will change the way we live, work, play and operate. Among its offerings is the Defiance Digital Revolution ETF (NFTZ), which offers long exposure to the blockchain and digital asset ecosystem. Recently, the company also launched the Defiance Daily Short Digitizing the Economy ETF (I BITE), which can be used as a tool to express a bearish view of the cryptocurrency ecosystem or hedge downside risk.

Some investors see cryptocurrencies, blockchain technology and digital assets as the wave of the future, others see them as a fad. Ultimately, different points of view are what makes a market. But one cannot ignore the fact that bitcoin has lost around 70% of its value in 2022, and a host of companies that operate in the crypto space have seen their stocks plummet. As a result, many long investors who have not sold their positions are facing huge losses in their portfolios.

IBIT is an actively managed ETF with a management fee of 0.95% that aims to track the daily inverse price and yield performance of the Amplify Transformational Data ETF (BLOK), calculated as gross total return. BLOK invests at least 80% of its net assets in equity securities of companies actively involved in the development and use of blockchain technologies. The IBIT seeks to provide the -1x daily return of the underlying benchmark.

“IBIT is an investment portfolio or hedging tool, and that’s not necessarily our opinion,” notes Sylvia Jablonski, CEO and CIO of Defiance ETFs. “Currently, no other ETF strategy competes with it. The ProShares Short Bitcoin Strategy ETF (COCK) is also an inverse ETF, but this product offers short exposure to bitcoin only.

The fund’s primary investment strategy is to use equity derivatives to short BLOK, or possibly BLOK-correlated equities, to gain inverse exposure. Essentially, for every $100 invested, the exposure is $100 short of BLOK. The fund is rebalanced daily. If BLOK goes down 1% today, then IBIT will also go up 1%, less fees and expenses. If an investor holds IBIT for a week, the return will be the sum of the change in BLOK for each day of that week. If BLOK falls 1% and IBIT rises 1%, IBIT becomes shorter the next day, so compounding works in the investor’s favor over time if BLOK continues to fall.

According to Jablonski, leveraged inverse ETFs have a few advantages over taking a short position in stocks or ETFs. Specifically, investors do not need a margin account and the loss is limited to the amount invested in the position.

Inverse ETFs tend to perform nearly 100% of the inverse of the fund they track, and their value rises as the market falls. However, investors should be aware that performance may deviate, particularly when the market is extremely volatile. Additionally, range-related volatility is not good for leveraged inverse ETF products as they are designed to reflect a view of the direction of the underlying assets.

The IBIT could be of interest to retail investors, who are the major players in the cryptocurrency and digital asset markets. It could also be a tool for registered advisers, family offices, pension funds, and large institutions that have allocations to cryptocurrencies, blockchain, digital assets, or crypto-mining companies. Some investors may use the IBIT as a short-term tool. Others may choose to keep it in a long-term portfolio. For example, they could hold a 5% position in IBIT if they want to hedge their crypto exposure at 5%. A long-short fund could use IBIT to generate alpha on the short side when BLOK shares fall, or as a hedge against falling prices.

Jablonski emphasized that the IBIT is a valuable tool, but it is not a set-and-forget tool. It encourages investors and traders of leveraged inverse funds, including IBIT, to monitor their positions daily.

The products are not issued, endorsed, sold or promoted by Nasdaq. Nasdaq makes no warranty as to the legality or suitability of, and assumes no liability. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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