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Are (Bitcoin) ProShares ETFs a Scam?

... and does it matter when you lose money anyway?

Are ProShares ETFs a scam? They definitely aren't. But do you care what they are when you consistently lose money, even when the market goes your way? I want to make this video since the beginning of this year, when I lost money by using ProShares UltraShort oil, despite the oil price actually going down. Oil went down 10%. So I was expecting to get a 20% return. I got a 10% loss instead. That's because it all happened slowly during a month, instead of a single day. More on that in a moment. Today, ProShares issues a "short Bitcoin" ETF. I looked past the misleading headlines and it's exactly the same as the oil ETF I bought from them. Bottom line, by holding the "Bitcoin short" ETF, you will likely lose money depending on the volatility, no matter if the price goes up sideways or slightly down and they don't hide it.

If you go to their manual with big, bold letters, they say exactly that. They say that the return for each day compounded might differ a lot, both in the value and in the direction from the returns of the benchmark. Volatility has a negative impact on fund's returns, and the volatility of a fund's benchmark may be at least as important to the fund's returns as the return of the fund's benchmark. So in the case of the Bitcoin shorting ETF, what such a clause would mean is that you trade more Bitcoin volatility than shorting actually Bitcoin. And here's that they state explicitly the fund, we lose money if its benchmark's performance is flat over time. It makes me feel stupid that I spent weeks before I believe it when it happened in front of my eyes. But I have an excuse. I did the calculations, but I thought that if they consistently lost money, then its price would have gone to zero after so many years.

But if you see historical prices, it's not zero. In contrast, it seems like it has some ultra-winner days. Unfortunately, those are quite aggressive stock splits that they do when the price starts to look pretty terrible in the graph. You don't make any money during those events. If you were about to see the real graph, you would see a line going straight down. How does this happen? It's stupid, simple. All ProShares ETFs are leveraged or short contracts and they compound daily returns. Let's say that the price of oil or whatever is $100 and remains stable. Okay. Let's say that next day it goes up $1 and the day after it goes down by $1. So the end price is just remaining flat. The same. Let's create a few days like that. And let's also extract these as a variable so we can play with that.

So what is the daily return of the benchmark? It'll be today's price divided by last day's. Okay. So 1% is the increase of the benchmark, but if we are leveraged or something, for example, let's name a leverage here. And we say that it is minus two, exactly as we would expect minus two and plus two minus two, and plus two and price exactly the same as in the beginning. And now let's see how much money we have in the fund. So it would be the price we have above, but with the effects of the return. Oh, look at this! At the end, we don't have $1. We have 0.98. So we lost 1% during those about two months of time. Let's see this in a graph. So as you can see, it pretty clearly goes down every day, right? More specifically, let's write here total return.

And we can see that during this duration, we lost 1%, which is of course not ideal, but not a big deal either. So you might really just ignore this, right? But what happens if the oil or the underlying price, doesn't go up and down just $1, but it goes $2 daily. Oh, so now you can see that the total return is -5%. You're losing money on a daily basis, although it's very small every day so you might not even notice it. What happens if it's something like 4%? Then you see that you lose 18%. What if we put $8 here? 53%. So this means that if oil price was going up and down $8 while staying stable every day, then after two months, you would be left with less than half of the money you got. How does this translate into Bitcoin? If the price is around $20,000, then this 8% volatility translates to about one and half thousand dollars. Do you think it's possible to see the price of Bitcoin go up and down by one and a half thousand dollars in a day? Actually let's project the return of Bitcoin short ETF over the past year.

So let's take the price here June 22 until June 21st of 2022. Format as a table. Okay, good. So let's take the prices and again, I will do exactly the same. So the daily return. Okay. And now let's invest $1 and see what happens to it. Okay. So let's plot the price of Bitcoin and let's see the price of that ETF.

So now look at this, right? The price of the Bitcoin started at 30,000. Right now it's at 20,000. So you would expect to have made some money, but as you can see, you pretty much have lost money here. Indeed. The last price is 0.95. So Bitcoin went down 35% and you, instead of making 35%, you lost 5%. And who took that? The answer is volatility. So it went up and down and it had crazy swings. And this is how you lost money, despite the fact that the market moved in your direction. Now, let me show you some other effect, which is if here we put -2. So if this is a leveraged shorted Bitcoin, you have to see that when Bitcoin went up to double its original price, you are down to 70 cents. That's good in a sense, because if you were really leveraged short you would be at zero at this point, right?

So that's the good thing, but the bad thing is that again, this 35% decline translates to you to losing even more money. So you can see that you have lost 44% of your value in your account. Despite the fact that Bitcoin went down 35%. So instead of getting a gain of 60%, you lose 40% of your account because of volatility. Of course, if you bought at the beginning of this year, you would have some pretty strong gains here, which is a very nice thing. And that's why this whole thing, you cannot say, it's a scam. It's just that you have to really understand how it works to avoid, surprises. You are not really betting just on the underlying Bitcoin or whatever, going up or down. You're betting implicitly on the volatility. Since you lose money consistently, when the market goes sideways, you can imagine that if the market goes your way, you still make less money.

At some point it breaks even. And at some further point, at last, you start making money. There have been lawsuits and headlines about ProShares, but they are not a scam. Why? Because they don't hide anything. The manual states the risks clearly. That even if the price goes sideways within one year, you might lose here. They say 63% of your capital. If there's lots of volatility and with other rates of volatility, you might need to go further on the profit side until you break even. You can see for example, for this huge volatility, that by the way, in terms of Bitcoin, it might even be kind of normal, that you have to expect the price to fall between 60 and 70% until you start making profits. So they don't hide anything. The tables are here and the warnings are here just that you have to go and really read, because this is not a simple instrument. This something completely different to just shorting Bitcoin.

Is ProShares the bad guys here? I don't think so. They give you a specialized, weird instrument. They don't force you to buy it. Why do they make such a weird instrument? I think that's because it's easy to make it. If they were about to really short Bitcoin, that might be complicated technically, and in terms of regulations. It's easier to make something weird rather than something simple. But they don't make money out of it, I hope. They just make money with regular fees. Is CNBC the bad guy? Yes. CNBC and whoever makes such headline is causing damage. So what does it say? "Short Bitcoin ETF". Now that you have seen how this works, do you really think this is a "Short Bitcoin ETF?" It doesn't look like that to me. You can see here, the ProShares' CEO quote saying that it allows you to obtain "short exposure to Bitcoin". Again, you see here "short Bitcoin-linked exposure". So even more vague phrasing and bottom line, the headline is the problem here. At very least, they should say that ProShares is launching a short-like Bitcoin ETF so that you get the hint and do more research. But I guess they do inaccurate and misleading headlines that make people lose money all the time. So no real news here. So are ProShares ETFs a scam? 100% not. But do you care what they are when you consistently lose money, even when the market goes your way?

Thanks for watching.

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