VolatilityShares, a pioneer in crypto-themed ETFs, has submitted a filing to the U.S. Securities and Exchange Commission (SEC) seeking to roll out a line of extremely leveraged products, such as 5x ETFs that follow bitcoin, ether, XRP, and Solana, as well as volatile stocks like Coinbase Global Inc (NASDAQ:COIN), Strategy Inc (NASDAQ:MSTR), Tesla Inc (NASDAQ:TSLA), and Alphabet Inc (NASDAQ:GOOGL).
If sanctioned, the suite would consist of 27 products across 3x and 5x leverage levels, effective as of Dec. 29, making them perhaps the riskiest crypto-tied products offered to American investors. Reactions to this reflect the unbelievable nature of the bet. “Nothing like this has been approved before and it probably wont go live, but I mean if it does … the ETF space will get crazy,” posted an X user.
The High-Stakes Math Of 5x Leverage
A 5x leveraged ETF amplifies price swings on a daily basis by five times. In reality, a 2% swing in BTC or ETH might shift the ETF by 10% on one day, up or down.
Daily rebalancing, required to maintain the leverage level, brings its own set of risks. Every night, the fund purchases after profits and sells after losses. This can accrue against investors over time in choppy markets. Even if Bitcoin ends the week up, a 5x ETF may lag due to these nightly resets, especially in illiquid assets like XRP.
A History Of Extreme Leverage
The filing does not happen in a vacuum. U.S. markets have come close to dramatic leverage previously. ForceShares had offered 4x ETFs in 2017, temporarily receiving SEC approval before the action was reversed, while VelocityShares’ 4x currency-linked Exchange Traded Notes were closed in 2020. European markets have experience with 5x leveraged offerings, yet their uptake remains niche compared with prospective U.S. demand.
Regulatory Grey Areas
Existing SEC regulations, under Rule 18f-4, provide guardrails on leveraged funds employing derivatives, with risk managers being required to estimate Value-at-Risk (VAR) to restrict excessive losses. While the rule offers substantial room for discretion, permitting firms to stretch the limits provided VAR calculations are within set limits.
The filings come on the back of crypto markets recovering from an unprecedented $19 billion liquidation earlier this week, highlighting the highly volatile environment for such outsize instruments.
For investors, VolatilityShares’ aggressive approach is both tempting and perilous at once. While upside potential is high, danger of quick, compound losses means these 5x ETFs are appropriate only for highly volatility-tolerant investors, or those with a financial thrill-seeking bent.
Read next:
Photo: Shutterstock
