As shown below, Bitcoin (BTC) continues to diverge from the Nasdaq. Over the past 2 months, Bitcoin is down 2% versus QQQ being up 5%:
Bitcoin is hyper-sensitive to the downside on everything: rate hikes, recession, stagflation, inflation, regulation, geopolitical instability, or even for no reason at all. It captures all the downside of the stock market with ‘high beta’, and less or none of the upside. This is exactly what you want in a hedge–you want heightened sensitivity to those big negative events, but less sensitivity on the upside when the market recovers, leading to a divergence as shown above. Even after the federal reserve cut interest rates by a quarter basis point this week, Bitcoin later dropped anyway as QQQ kept going up.
A lot of people assumed that Bitcoin would outperform, but as I correctly warned a month ago, Scott Bessent dismissing the possibly of Bitcoin purchases took the wind out of its sails. People were initially in denial, but it has become evident (as I also correctly predicted) that the Bitcoin reserve is not going to happen as hoped. At best it will be some shitty stockpile of seized crypto assets, not a reserve funded by open-market Bitcoin purchases.
Shorting Bitcoin as a hedge solves a major problem that was seen in 2022 and 2025: How does one hedge a market decline when all assets fall? It had generally been assumed that treasury bonds and gold would offer hedging and diversification against a market decline. That failed spectacularly in 2022, when the QQQ and SPY fell 32% and 19% respectively, but long-term Treasury bonds fell between 20-30% (depending on the duration) and GLD fell 1%. Also, in 2022 buying volatility futures or buying out-of-money put options (so-called ‘tail hedging’) didn’t work either. Nothing worked except shorting Bitcoin (or just going to cash). Same for the March-May 2025 selloff due to Trump’s tariffs: bonds and gold failed to hedge adequately, but shorting Bitcoin did.
By shorting Bitcoin, compared to put options or buying volatility futures, there is minimal to no carry cost, which can significantly eat into returns. In fact, it’s the opposite: because Bitcoin futures contracts are in contango, it means a positive carry by shorting it. By comparison, buying volatility futures has the opposite effect, so a negative carry. This can make a difference of 15% or more annually. For example: shorting Bitcoin futures and collecting a 5%/year ‘roll yield’ vs. 10% annual drag by buying volatility futures or index puts.
The math behind modeling put options returns under various conditions is also much more difficult, compared to analyzing only correlations of the Bitcoin hedge. Option pricing has various complicated formulas called Greeks, which behave in often unpredictable ways, as seen in 2022 when out-of-money put options failed to ‘explode’ as they did during the ‘Great Recession’ of 2008 or in 2020 during Covid. This was due to the ^vix index in 2022 failing to adequately ‘spike’ as it had done during past market declines.
Of course, when one zooms out over longer than 2 months, Bitcoin has done better and has even outperformed QQQ, but shorting Bitcoin is not the entire portfolio. For example, one can allocate a small percentage of the portfolio, maybe 30%, to an ETF that acts as a synthetic short of Bitcoin, such is BITI, and the other 70% tech stocks. Due to the above contango roll yield tailwind, BITI has actually held up better one would have naively expected.
Sure, Bitcoin has done well, but there is also the peace of mind of shorting Bitcoin and knowing with an extremely high degree of confidence that if the market drops a lot I will be protected, which in 2022 could not be said for other hedging strategies.