Defiance ETFs Files to Launch Bitcoin (BTC) vs. Ethereum (ETH) Pairs Trading ETFs

Defiance ETFs has filed for regulatory approval of four new exchange-traded funds (ETFs), some of which include simultaneous long Bitcoin (BTC) and short Ethereum (ETH).

Defiance ETFs is venturing into new territory with its application for four exchange-traded funds (ETFs) that combine long Bitcoin (BTC) with short Ethereum (ETH).

According to a May 6 filing with the US Securities and Exchange Commission (SEC), the funds are structured to track the leveraged performance of one asset against another using derivatives.

These ETFs will be actively managed and aim to provide total return through synthetic exposure to the underlying assets.

The funds, marketed under the BattleShares brand, typically seek to maintain a 150% to 220% exposure to the long asset and a -150% to -220% exposure to the short asset.

Instead of direct spot asset holdings, the ETFs establish leveraged exposure using a combination of futures contracts, swaps, options, and US-listed ETFs or exchange-traded products (ETPs).

The structure of the ETFs is designed to take advantage of price differentials between the long and short asset pairs.

For instance, the investment thesis behind the Bitcoin vs. Ether ETF is to generate returns when Bitcoin outperforms Ether over the holding period. Conversely, the Ether vs. Bitcoin ETF is targeted at investors who anticipate stronger performance from Ether.

It's important to note that none of the ETFs invest directly in the assets they track. They gain exposure through financial instruments issued by other funds or derivatives markets.

Where applicable, up to 25% of assets may be allocated to a Cayman Islands subsidiary to maintain favorable US tax treatment under Regulated Investment Company (RIC) rules.

The filing highlights that this derivative structure allows the funds to avoid custody risks associated with direct holdings of digital assets or physical gold.

However, this structure adds complexity, including exposure to counterparty risk, tax constraints, and high turnover due to frequent rebalancing.

The funds are designed to be non-diversified and will have high portfolio turnover due to frequent rebalancing driven by market volatility, asset momentum, and derivative expiration cycles.

The strategy involves continuously adjusting exposure to maintain target leverage and balance between the paired long and short positions.

Due to leverage, investors may see amplified gains or losses relative to the underlying asset movements. The product documentation emphasizes that performance is based on relative, not absolute, asset values, making the ETFs unsuitable for directional exposure to a single asset.

This year-to-date performance of the “long Bitcoin, short Ethereum” strategy would be highly profitable for investors. As of press time, BTC is up by 1%, while ETH has declined by nearly 47% in the same period.