Profiting in a Down Market for Bitcoin: Exploring the Southern East Ying ETF

Author: WolfDAO

Recently, CSOP launched a new inverse Bitcoin ETF (CSOP Bitcoin Futures Daily (-1x) Inverse Product, Code: 7376.HK), which has attracted widespread attention.

Through this product, investors can profit when the Bitcoin market declines, making it an attractive option for those who are pessimistic about Bitcoin or wish to hedge, especially traditional investors. This article will explore the characteristics, market potential, and operability of this ETF from multiple angles, discussing this innovative tool together.

Basic Characteristics of the ETF

1. Underlying Assets and Market Behavior

An inverse Bitcoin ETF is a financial product that performs inversely based on Bitcoin futures prices. When Bitcoin futures prices fall, the value of the ETF rises, and vice versa. It achieves its investment objective by holding short positions in CME Bitcoin futures rather than directly investing in Bitcoin, allowing investors to gain returns even when the cryptocurrency market is declining. It is important to note that this product is limited to intraday trading and is not designed for long-term holding to ensure the effectiveness of intraday inverse returns.

2. Strategic Advantages of the ETF

Hedging Tool

High Liquidity: Traded on the main board of the Hong Kong Stock Exchange

Cost-Effectiveness: Compared to directly shorting Bitcoin, the costs of operating through an inverse ETF are relatively low. Its management fees and annual ongoing charges are relatively transparent, allowing investors to better control investment costs.

Intraday Trading: For investors keen on short-term operations, intraday trading strategies can leverage its daily inverse return characteristics to quickly profit from fluctuations in the Bitcoin market.

3. Who Can Trade

Any investor with a main board account at the Hong Kong Stock Exchange and who has activated index trading permissions can trade this product.

As a financial product, it combines hedging functionality, high liquidity, and cost-effectiveness, making it suitable for strategic short-term investors and providing new options for those looking to profit from fluctuations in the Bitcoin market. As the first inverse futures ETF in Asia, it has attracted a certain level of market attention, but its actual effectiveness still needs further analysis.

Composition of CSOP Series Products

The CSOP Bitcoin Futures Daily (-1x) Inverse Product (Code: 7376.HK) serves as an innovative financial product, with its composition design playing a key role in achieving its investment objectives. CME Bitcoin futures (and/or micro Bitcoin futures) account for 60% of the net asset value (NAV), while cash (in HKD or USD) and other HKD or USD-denominated investment products account for 40% of the NAV.

Investment Strategy

With Bitcoin futures contracts accounting for 60% of the net asset value, this arrangement is primarily designed to effectively achieve its daily -1x investment objective while also leveraging the liquidity and maturity of the CME Bitcoin futures market. The allocation of 40% cash (in HKD or USD) and other HKD or USD-denominated investment products ensures the fund's liquidity and also aids in risk management. This cash position is relatively reasonable, helping the fund quickly adjust its investment strategy and reduce risk during significant market fluctuations.

Daily Rebalancing Mechanism

Since this product is designed to provide daily inverse returns, daily rebalancing is an important component. After the trading day ends, the fund manager will adjust the positions based on the changes in Bitcoin futures prices to ensure that the ETF's net asset value accurately reflects the inverse changes in Bitcoin futures prices at the opening of the next trading day. This daily rebalancing mechanism makes the ETF more suitable for short-term trading strategies rather than long-term investment.

Management Fees

The management fee for this inverse Bitcoin ETF is 1.99% (the ETF's annual ongoing expenses are expected to be 2.00%. Ongoing expenses include management fees, custody fees, trading fees, etc.). The management fee is used to cover the operating costs and management services of the fund management company. This fee level is competitive among similar products (although it is relatively high compared to some U.S. ETH spot ETFs, it remains competitive in traditional markets), helping to attract more investors.

Trust Structure

This ETF is managed by CSOP Asset Management Limited and is custodied by HSBC Institutional Trust Services (Asia) Limited. The fund's assets are held by an independent custodian, ensuring the safety and transparency of the assets. This trust structure provides additional protection for investors and helps enhance market confidence.

Compounding Operation of Inverse Products (-1X)

According to charts provided by CSOP, the compounding effects of the inverse Bitcoin ETF vary significantly under different market conditions.

Compounding Effect in an Upward Trend of the Index

• When the index continues to rise, the decline of the inverse ETF is less than the inverse return of the index. Although the index rose by 46.41%, the inverse ETF only fell by 34.39%, which is referred to as outperformance.

Operational Strategy:

Short-term Holding: In an upward trend, the decline of the inverse ETF is less than the inverse return of the index. In this case, holding the inverse ETF for a short term can yield relatively good performance. Investors can buy in the early stages of an upward trend and sell before the trend ends.

Stop-Loss Management: Set reasonable stop-loss points to prevent losses from market reversals.

• When the index continues to decline, the rise of the inverse ETF is greater than the inverse return of the index. Although the index fell by 34.39%, the inverse ETF rose by 46.41%, which is also referred to as outperformance.

Operational Strategy:

Active Holding: In a downward trend, the rise of the inverse ETF is greater than the inverse return of the index. Investors can actively hold the inverse ETF after confirming a market downtrend to fully utilize the profits from the market decline.

Incremental Buying: Gradually buy the inverse ETF during market declines to optimize holding costs.

• When the index fluctuates within a range, the performance of the inverse ETF often lags behind the inverse return of the index. Although the index overall fell by 7.43%, the inverse ETF only rose by 2.47%, which is referred to as underperformance.

Operational Strategy:

Short-Term Trading: In a volatile market, the performance of the inverse ETF often lags behind the inverse return of the index. Investors should adopt short-term trading strategies to profit from daily market fluctuations.

Frequent Adjustments: Frequently adjust the holdings of the inverse ETF based on short-term market fluctuations to avoid underperformance from prolonged holding.

Operational Tips for Compounding Effects

Although the inverse Bitcoin ETF may not exhibit significant compounding effects in long-term holding, the following operations can be attempted:

Daily Reinvestment: Reinvest daily earnings to maintain efficient capital utilization. For example, settle earnings daily or weekly and adjust holdings to achieve short-term compounding effects.

Dynamic Rebalancing: Dynamically adjust the holding ratios based on market changes, continuously optimizing the investment portfolio with short-term profits.

Trend Following: In clear upward or downward trends, gradually increase or decrease the holdings of the inverse ETF through rolling investments and incremental strategies to fully utilize the compounding effects brought by market trends.

Suitable Audience and Scenarios

As an inverse futures Bitcoin ETF, its intraday trading characteristics make it unsuitable for all investors and not applicable to all traditional investors interested in Bitcoin. Based on its product design, it is currently most suitable for the following four types of clients:

Intraday Traders: This ETF is designed for short-term trading, especially for intraday traders. They can leverage intraday fluctuations in the Bitcoin futures market to gain profits through quick buying and selling.

Investors Seeking Risk Management: For those looking to hedge against the downside risk of Bitcoin spot or related assets, this ETF is an effective tool. They can reduce losses in a bearish Bitcoin market by holding this inverse ETF.

High-Risk, High-Return Speculators: This ETF attracts investors willing to take on high risks in pursuit of high returns. They utilize short-term market fluctuations for high-leverage speculation, quickly entering and exiting the market to seek substantial profits from volatility.

Swing Traders: In bear and volatile markets, this ETF is suitable for swing traders who can capitalize on periodic market fluctuations through multiple buy and sell transactions, capturing trading opportunities against the trend.

Unsuitable Scenarios: In markets with fluctuating index trends where the index alternates between daily ups and downs, the returns of inverse products may not meet expectations. This is due to the compounding effect of daily returns, which can lead to deviations from the simple opposite value of daily index returns in long-term holding.

Actual Market Performance of the Product

Estimated Daily Net Asset Value & Market Price

On August 2, the unit net value showed significant growth, demonstrating a healthy upward trend in both USD and HKD. The net value in USD increased by 1.31%, and the ETF performed well in the market that day. The closing price in HKD also rose slightly by 0.36%, reflecting the optimistic sentiment of market investors.

Market Information as of August 5, 2024

Market Price and Trading Volume Analysis

1. Market Price Changes

Time Range: July 23, 2024, to August 5, 2024

Price Range

Highest Price: 10.170 HKD (August 5)

Lowest Price: 7.595 HKD (July 29)

Closing Price: 9.850 HKD (August 5)

2. Trading Volume Analysis

Highest Trading Volume: 1,799,500 (August 5)

Average Trading Volume (5-SMA): 565,400

3. Price Trends

• From the price chart, it can be seen that the inverse Bitcoin ETF reached its peak of 8.315 HKD on July 25. Subsequently, the market experienced an emotional pullback, dropping to a low of 7.595 HKD on July 29. However, on July 30, the price rebounded to 7.965 HKD, indicating that the market began to regain confidence.
• The chart shows that after hitting a low of 7.595 HKD on July 29, the inverse Bitcoin ETF gradually recovered, reaching a peak of 10.170 HKD by August 5.
• During the period from July 29 to August 5, the price steadily increased, indicating a relatively optimistic market sentiment and growing demand for the ETF.

Conclusion

Looking at the trading trends of this ETF, the performance in the first week highlights initial enthusiasm followed by a rational return. The high trading volume on its launch date, July 23, indicates strong market anticipation for the new product. The relatively stable trading in the following days reflects the market's recovery after initial volatility. The price low on July 29 may be a result of short-term market rebounds or profit-taking by investors, underscoring the complexity and variability of the market and the diverse strategies of investors.

The significant fluctuations on August 4 and 5 brought some vitality and market interest to the ETF, with the substantial increase in trading volume indicating a corresponding market demand. As the cryptocurrency market in Hong Kong gradually matures and diversifies, even though this ETF has not yet stirred significant waves, it serves as a crucial bridge connecting the cryptocurrency market with traditional markets.

Contributors: Sylvia / Mat / Darl

Editing and Proofreading: Punko

Special Thanks: Thanks to the above contributors for their outstanding contributions to this issue.