If you’re an investor in Bitcoin (BTC -0.34%) or Ethereum (ETH -1.38%) and you’re looking for even more market fluctuations and risk, this news might pique your interest. On October 2, the Securities and Exchange Commission (SEC) gave the green light for an exchange to introduce Volatility Shares’ 3x Bitcoin ETF and the 3x Ether ETF. Both are leveraged exchange-traded funds designed to provide triple the daily price movements of their respective cryptocurrencies.
As of my writing on October 21, these funds are not yet available for trading because a necessary SEC registration step has yet to be scheduled. The key question remains: will these ETFs be worth investing in once they start trading?
Image source: Getty Images.
Understanding Leveraged Returns
The proposed ETFs will utilize futures, contractual agreements to purchase an asset at a predetermined price in the future, while adjusting their exposure daily. This daily adjustment is crucial for maintaining the ETF’s constant leverage, but it also poses a significant risk for investors.
For instance, if a cryptocurrency appreciates by 10% in one day, the fund could increase approximately 30% on that day, generating excitement among investors.
However, if the value of the cryptocurrency subsequently declines to its initial price—a decrease of about 9.1%—while a regular holder would break even, those invested in the leveraged ETF could incur losses of about 5.5%. This scenario is detailed in the fund’s prospectus and mirrors the challenges faced by another comparable leveraged Bitcoin ETF, the Volatility Shares 2x Bitcoin ETF.
The latter lost 61.9% over the year ending October 21, despite Bitcoin experiencing only a 25.1% downturn in the same timeframe.
According to the prospectus, the Bitcoin ETF will impose a management fee of 1.85% annually, while both the Bitcoin and Ether ETFs must achieve returns of 1.98% and 2.78%, respectively, just to reach profitability. Additionally, although consistent gains can accumulate substantial value, the mathematics of leverage imply that a single rough trading day can wipe out considerable worth.
Are Leveraged Bitcoin and Ethereum ETFs Worth It?
These ETFs are generally not suitable for average investors looking to buy and hold over extended periods. Their design caters more to hedge funds and institutional investors making complex trades across multiple assets with hedging strategies.
Therefore, most investors should steer clear.
Nonetheless, both cryptocurrencies can still be worthwhile for those with a long-term perspective. Purchasing Ethereum or Bitcoin directly, or through spot ETFs, provides a more effective strategy than engaging in leveraged trading, primarily due to lower fees and the absence of leverage-induced volatility.
This approach allows you to hold these assets for years, potentially yielding a favorable return instead of risking liquidation.