Market Overview

Shorts Take Aim At Bitcoin Investments

Shorts Take Aim At Bitcoin Investments

In advance of Sunday's debut of bitcoin futures, the cryptocurrency slid late last week. Bitcoin has been surging this year, punishing traders that dare take bearish views on the digital currency.

Bitcoin's astronomical rise isn't preventing some short sellers from taking aim at assets related to the cryptocurrency. That includes the Bitcoin Investment Trust (OTC: GBTC). One share of GBTC currently represents just over 0.09 bitcoin, meaning the trust's performance won't be identical to that of bitcoin itself. Still, GBTC is up nearly 1,200 percent this year.

GBTC “enables investors to gain exposure to the price movement of bitcoin through a traditional investment vehicle, without the challenges of buying, storing, and safekeeping bitcoins,” according to Grayscale, the trust's issuer.

Not Keeping Shorts Away

Despite is staggering year-to-date ascent, GBTC isn't keeping short sellers at bay. Data suggest bearish traders are comfortable betting on downside for the bitcoin trust.

“Since the start of October short demand has increased over 60 compared, compared with GBTC price increasing over 150 percent,” said Markit. “Pressing against the trend has caused the value of the short position to increase to over $110 million. Aside from the bet against BTC price the shares of the trust were also trading at a premium to asset value, which has been pointed out as part of the motivation for shorting the vehicle.”

Funds that trade at premiums to net asset value (NAV) are often favorite targets of short sellers that bet the premium won't persist for extended periods and that the fund will eventually retreat to levels more inline with its NAV.

“The increase in bitcoin price has been met with skepticism by short sellers, who have recently increased bets against Bitcoin Investment Trust,” said Markit. “Short interest is also rising in firms which have enjoyed a halo effect based on their involvement in the cryptocurrency or their use blockchain.”

Another Idea

Investors that want to bet on a short covering rally in GBTC without directly owning shares of the trust could turn to the ARK Web x.0 ETF (NYSE: ARKW).

GBTC is ARKW's largest holding at a weight of 7 percent, or 72 basis points larger than ARKW's allocation to, Inc. (NASDAQ: AMZN). Bitcoin exposure has helped ARKW to a year-to-date gain of 79 percent, one of the best performances among all non-leveraged ETFs.

ARKW has additional bitcoin short covering potential. About 4 percent of Square Inc's (NYSE: SQ) shares outstanding are sold short, according to Markit data. Square accounts for more than 2 percent of ARKW's weight.

From 8-9 a.m. Dec. 19, Benzinga's PreMarket Prep Show will devote its entire broadcast to the fascinating new topic of cryptocurrency. Early investors will be represented as well as staunch bitcoin critics. The podcast will include background information and the upcoming changes in the marketplace that will have a long-term impact on bitcoin’s true value.

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