The Tell: This short ETF is soaring as it benefits from crypto tumult after FTX collapse

United States

A recently launched exchange-traded fund has been benefiting from turmoil in the cryptocurrency industry, soaring more than 20% since its inception in September. 

The Defiance Daily Short Digitizing the Economy ETF IBIT, , which is a bet against the Amplify Transformational Data Sharing ETF BLOK, +0.36%,  is up almost 21% since it began trading on Sept. 8, according to FactSet data through Monday.

The Amplify ETF, which seeks to identify companies focused on the transformation and development of the blockchain and cryptocurrency markets, has plunged so far in 2022. It was down 60.1% this year through Monday, FactSet data show.

Defiance created the short ETF with the idea that the crypto industry would broadly suffer should an event such as an exchange business running into trouble arise, said Sylvia Jablonski, chief executive officer and chief investment officer of Defiance ETFs, in a phone interview.

“We never imagined it would be in FTX,” she said. “FTX was supposed to be this sort of stable, white knight in the crypto industry.”

FTX, the crypto exchange founded by its former CEO Sam Bankman-Fried, filed for bankruptcy protection on Nov. 11. The collapse of his empire has sent shock waves through the industry, with bitcoin recently sinking below $ 16,000 as investors worry other crypto-related companies could also fall.

Read: Coinbase worth less than $ 10 billion for the first time as ‘crypto winter’ continues to set in

John Ray, III, the new CEO of FTX, last week filed a declaration in U.S. Bankruptcy Court assessing the company’s collapse, saying he was unable to create a list of FTX’s top 50 creditors that included customers, among other revelations.

See: ‘This situation is unprecedented’: 10 crazy things detailed in FTX’s bankruptcy filing

Defiance viewed the Amplify fund as a good representation of companies tied to blockchain technology, digital assets and the crypto industry, said Jablonski, “so we shorted this ETF.” 

The actively managed Amplify Transformational Data Sharing ETF’s top 10 holdings at the end of October included MicroStrategy Inc. MSTR, +3.75%, International Business Machines Corp., Accenture Plc, SBI Holdings Inc., Inc., GMO Internet Group, CME Group Inc., Coinbase Global Inc. COIN, -2.83%, Silvergate Capital Corp. SI, +3.52%, Marathon Digital Holdings Inc. MARA, -4.01%, according to the fund’s November report.

Other companies that the ETF held last month included Block Inc. SQ, -0.84%, Riot Blockchain Inc. RIOT, +0.23%, Digital Garage Inc., Hive Blockchain Technologies, Galaxy Digital Holdings Ltd., Robinhood Markets Inc. HOOD, -0.74% and Roblox Corp, the report shows.

Defiance expects that in the short term, many companies with ties to the crypto ecosystem are going to suffer because of the FTX collapse, according to Jablonski. “A lot of the dominoes haven’t fallen yet,” she said.

Read: Bitcoin tumbles to fresh lows and Grayscale trust discount worsens as Genesis denies imminent bankruptcy

The Defiance Daily Short Digitizing the Economy ETF is designed for investors who either are bearish on crypto or are bullish but want to hedge the current environment, according to Jablonski. The fund provides daily inverse exposure to the Amplify Transformational Data Sharing ETF.

While some investors may be looking for a “permanent hedge” to their long, crypto-related exposure, traders should regularly revisit their industry outlook, she said. “With inverse funds, you always want investors to make that decision on a regular basis,” said Jablonski, as “they’re daily rebalanced.”

On the long side within crypto, Defiance offers an ETF that provides equities exposure related to the blockchain, digital assets and technologies tied to non-fungible tokens, commonly referred to as NFTs, she said. The Defiance Digital Revolution ETF NFTZ, -2.59%, which launched in December, has plummeted about 73% this year through Monday, according to FactSet data.

While Jablonski expects “billions of dollars of losses” in the crypto “ecosystem” may still lie ahead over the short term, she also thinks that blockchain technology and some digital assets, such as bitcoin, will survive the turmoil.

Meanwhile, the ProShares Bitcoin Strategy ETF BITO, , which invests in bitcoin futures, has plunged 66.8% this year through Monday, FactSet data show. ProShares also offers a way for investors to bet against the cryptocurrency, with the ProShares Short Bitcoin Strategy ETF BITI, -0.07%.

Crypto isn’t “dead,” Jablonski said. “This is a wake-up call for the industry.”

Some investors and traders who previously were “pooh-poohing” the notion of regulation because it went against the spirit of “peer-to-peer collaboration” are now “wrapping their heads around” the idea that it could be “very helpful” for the growth of the industry, she said.