Derivatives and leverage are utilized by the ETFs to provide investors with exposure to price fluctuations among Bitcoin, Ethereum, and gold.
Defiance ETFs has sought regulatory approval for four newly proposed exchange-traded funds (ETFs), with some filings including positions that go long on Bitcoin (BTC) and short on Ethereum (ETH).
A filing submitted on May 6 to the U.S. Securities and Exchange Commission (SEC) disclosed the proposed funds, which include the Bitcoin vs. Ethereum ETF—holding a long position in BTC and a short position in ETH; the Ethereum vs. Bitcoin ETF—long on ETH and short on BTC; the Bitcoin vs. Gold ETF—long on BTC and short on gold; and the Gold vs. Bitcoin ETF—long on gold and short on BTC.
Filed under the BattleShares branding, each fund actively tracks the leveraged performance of one asset against another using derivatives. The funds aim to deliver total returns by generating synthetic exposure to the respective underlying assets.
The funds generally set exposure targets between +150% and +220% for long positions and between -150% and -220% for short positions.
Leveraged Synthetic Strategy: Long Bitcoin, Short Ethereum
The funds create leveraged exposure by using a mix of futures contracts, swaps, options, and U.S.-listed ETFs or exchange-traded products (ETPs) instead of directly holding spot assets.
The prospectus outlines that the ETFs aim to capitalize on price disparities between paired long and short assets.
The Bitcoin vs. Ether ETF focuses on delivering returns when Bitcoin outperforms Ether during the holding period. In contrast, the Ether vs. Bitcoin ETF targets investors who expect Ether to deliver stronger performance.
None of the ETFs directly invest in the underlying assets; instead, they gain exposure through financial instruments issued by other funds or accessed via derivatives markets.
To preserve favorable U.S. tax treatment under Regulated Investment Company (RIC) rules, the fund may allocate up to 25% of its assets to a Cayman Islands-based subsidiary when necessary.
The filing notes that the funds use a derivative-based structure to mitigate custody risks typically associated with directly holding digital assets or physical gold.
Nevertheless, the structure introduces added complexity, as it brings exposure to counterparty risk, potential tax limitations, and elevated turnover resulting from frequent portfolio rebalancing.
High-Turnover Strategy Backed by Dynamic Operational Framework
The funds follow a non-diversified structure and are expected to undergo high portfolio turnover due to frequent rebalancing driven by market volatility, shifts in asset momentum, and the expiration cycles of derivative instruments.
The strategy continuously adjusts exposure to preserve the target leverage and maintain balance between the paired long and short positions.
Because of the use of leverage, gains or losses experienced by investors may be magnified in comparison to the movements of the underlying assets. The product documentation states that the ETFs determine performance based on the relative values of the paired assets, not their absolute price changes, making them unsuitable for investors seeking directional exposure to a single asset.
The “long Bitcoin, short Ethereum” strategy would have resulted in significant profitability for investors based on year-to-date performance. As of the time of reporting, Bitcoin (BTC) has increased by 1%, while Ethereum (ETH) has declined by nearly 47% during the same timeframe.
