BITU: Not A Good Time For Leverage In Crypto

Summary ProShares Ultra Bitcoin ETF is a 2x leveraged bitcoin ETF facing significant downside risk amid current bearish technical patterns. BITU severely underperformed its expected 2x return, posting a -65% one-year loss vs. IBIT's -17%, due to volatility drag. Technical analysis highlights bearish flag and head-and-shoulders patterns in Bitcoin, signaling potential for further sharp declines. We rate BITU a 'Sell,' anticipating up to -50% downside over the next six months given macro and technical headwinds. Thesis Crypto officially became an asset class for us when it got structured within the exchange-traded fund wrapper. Since the introduction of Bitcoin via the iShares Bitcoin Trust ETF ( IBIT ), crypto has virtually exploded on traditional exchanges with leveraged and covered call funds. To fully understand the quick adoption, please remember that IBIT was the fastest-growing ETF ever in history after launch. In today's article we are going to discuss a 2x leveraged ETF based on bitcoin, namely the ProShares Ultra Bitcoin ETF ( BITU ), and highlight our macro view on the currency and why BITU should be avoided. What is BITU? BITU is an exchange-traded fund that targets 2x daily bitcoin returns. The name falls in the leveraged products category; thus, investors need to remember the FINRA suitability guidance on the product: * Most leveraged ETFs are designed to achieve their stated objective on a daily basis only. * Holding these funds for longer than one day, particularly in volatile markets, can result in performance that differs significantly from the underlying index. * They are not intended to be held for intermediate or long periods and can experience "volatility drag" where the underlying index remains flat, but the leveraged ETF loses value. The ETF uses swaps and futures to achieve its goal: Fund Holdings (Fund Website) Swaps are OTC contracts that can be structured to provide any agreed-upon returns in exchange for a recurring fee. Doing it via swaps removes any potential basis between the structure and a 2x daily return. When performance warnings from FINRA are spot-on Remember the warnings from FINRA we posted above in the article? Guess what - they were spot on: Data by YCharts Looking back on a 1-year period, we can see BITU severely underperforming the expected 2x bitcoin return. While IBIT is down -17% (we are using IBIT as a bitcoin proxy), one would expect a BITU performance somewhere around -34%. What did BITU actually do? It posted a -65% figure. Leveraged ETFs like BITU only work well in momentum-driven, up-trending markets. In range-bound or down-trending ones, they tend to outperform on the downside. And momentum has definitely shifted to the downside in our view. Bitcoin technical take There are two large bearish technical patterns forming on bitcoin: Bearish Flag From a technical standpoint, bitcoin is forming a bearish flag pattern: A bearish flag is a technical chart pattern signaling a brief pause in a strong downtrend, suggesting the downward trend will likely continue, acting as a continuation pattern where a sharp price drop (flagpole) is followed by a small, upward-sloping consolidation channel (the flag) with decreasing volume, before breaking lower again. A visual representation of a bearish flag pattern is as follows: Bear Flag (Technical Analysis) Now let us take a look at what Bitcoin has been doing: Bear Flag Bitcoin (TrendSpider) While not every reader might be a fan of technical analysis, patterns usually are correct, especially when they present such a 'clean' take on a theoretical graph. Head and shoulders This is another technical trading pattern that can be 'seen' on the bitcoin charts: The Head & Shoulders pattern is a key chart formation in technical analysis that signals a potential market reversal from an uptrend to a downtrend. It consists of three peaks: a higher middle peak (the "head") flanked by two lower peaks (the "shoulders") and a support line called the "neckline." From a visual standpoint, the head-and-shoulders pattern looks like this: H-n-S Pattern (Corporate Finance Institute) The pattern is a bearish one, with most analysts anticipating a decline equal to the change from the neckline to the top. So if the security experienced a +20% gain from the neckline to the top of the head-and-shoulders pattern, then a forecasted -20% loss is penciled in when the neckline is broken. Currently the bitcoin chart looks as follows: Bitcoin price (Seeking Alpha) In our view, once the $75,000 level neckline is broken, the bearish pattern would be fully validated. On the downside, some analysts use the difference between the neckline and the top as a downside target. From $75,000 per bitcoin to $120,000 per bitcoin, the upside was +60%, so in the most bearish scenario, bitcoin should fall -60% from the neckline, with a target of $30,000. The magnitude of the downside is disputable, though. What does this all mean for BITU? A bearish down market for Bitcoin means BITU is going to continue to lose significant value, and most likely more than just 2x the Bitcoin price. Remember that during the bitcoin up-market, a lot of market participants used leverage to juice up returns. Now the same leverage is responsible for a cascade of liquidations and market pressure: Bitcoin slipping under $80K didn't just hurt traders… it triggered one of the nastiest liquidation cascades crypto has ever seen. We're talking roughly $2.5 BILLION in leveraged positions getting erased in a single wave. That puts this crash in the same league as some of the ugliest moments in crypto history. Bigger than the Covid crash. Bigger than parts of the FTX meltdown. This wasn't slow selling - this was forced liquidation dominoes. As embedded leverage gets cleared out via liquidations, the daily moves might get very violent. High volatility during bear markets is bad for BITU, and holding leveraged bitcoin exposure in this environment is not a good position to have. If Bitcoin has another -20% downside from here, expect more than -40% down for BITU given the daily volatility figures. We are bearish on Bitcoin here and very bearish on BITU. Conclusion BITU is a 2x leveraged long on Bitcoin. The ETF is plagued by the issues associated with leveraged ETFs and underperforms in volatile down markets. With bearish technical patterns forming on Bitcoin, we see only downside here, with the potential for a -50% return in the next six months. We are a 'Sell' for this name at the current macro juncture.