- The first set of 3x Bitcoin ETF products has been approved by the SEC.
- Volatility Shares still needs effective registration before the Bitcoin and Ethereum funds can trade.
- Daily resets and futures costs can increase volatility decay and reduce longer-term leveraged returns.
The Securities and Exchange Commission of America has sanctioned the listing of the first batch of exchange-traded funds that provide three times the daily performance of Bitcoin and Ethereum futures.
The recent decision made by the commission in October has permitted Cboe BZX Exchange to list six triple leveraged ETFs offered by Volatility Shares, increasing the leveraged opportunities in U.S. crypto market from the earlier 2X.
Source: Watcher.Guru
This sanction is for products related to Bitcoin, Ethereum, gold, silver, crude oil, and natural gas. However, the funds cannot begin trading immediately. Volatility Shares must still receive an effective registration statement from the SEC, and the agency’s order does not establish a deadline for that process.
The two crypto products will use regulated Bitcoin and Ethereum futures rather than holding the underlying cryptocurrencies. The funds are part of VS Trust, which Volatility Shares sponsors and manages.
SEC Clears 3x Bitcoin ETF and Ethereum Product
The SEC’s decision followed a Cboe BZX rule change submitted on Aug. 10. The exchange sought approval for the triple-leveraged products because its existing generic listing standards for commodity trusts excluded funds seeking a multiple or inverse exposure to a benchmark.
The SEC received no public comments on the proposal. Its Division of Trading and Markets subsequently approved the rule change under delegated authority.
However, although the names of the products include the words “ETF,” the SEC order categorizes the products as commodity-based trust shares. The shares of these products have been registered under the Securities Act of 1933, but not under the Investment Company Act of 1940.
The fund will contain first- and second-month futures contracts in the respective commodities. For the Bitcoin and Ethereum funds, this means that the volatility will be based on the future contracts and not on either Bitcoin or Ethereum cryptocurrencies.
Volatility Shares already provides 2x Bitcoin and Ethereum products under BITX and ETHU tickers respectively. The SEC order identifies those funds among leveraged products currently trading on U.S. exchanges.
Daily Reset Creates Different Risk Profile
The new 3x Bitcoin ETF and its Ethereum counterpart are designed to maintain three times the daily move of their respective futures benchmarks. The above-mentioned exposure resets every trading day, leading to different outcomes over periods of time that extend beyond just one trading day.
For instance, in the event that there is a 10% increase in the price of Bitcoin on one trading day followed by a 10% decrease on the next trading day, the actual asset will finish the two days down by 1%, but the 3x leveraged product will be down by 9%.
This effect is commonly referred to as volatility decay. The preliminary prospectus from Volatility Shares warns that greater benchmark volatility increases the potential for such decay.
The daily reset also requires the funds to adjust their futures positions. After gains, they must increase exposure to maintain the targeted leverage, while losses require them to reduce exposure. Those transactions can create mechanical trading flows, particularly around the end of the trading day.
Bloomberg Senior ETF Analyst Eric Balchunas said on X that leveraged ETFs are intended for trading rather than investing. Blockstream CEO Adam Back separately warned that automatic re-leveraging strategies can lose capital when Bitcoin moves sideways in a highly volatile market.
Futures Costs Add Another Performance Drag
The products also face costs associated with their use of futures contracts. As futures approach expiration, the funds must replace expiring contracts with contracts dated later. The prospectus notes that these rollover costs can reduce returns.
Volatility Shares also describes an investment in its 3x Bitcoin ETF as speculative and says it is intended only for investors who can bear the risk of a total loss.
The SEC’s approval does not establish when either crypto product will start trading. The funds must clear the remaining registration requirement before launch.
