This week, several more leveraged funds leveraging cryptocurrencies hit the market.
Direxion, best known for its leveraged exchange-traded funds (ETFs), launched bullish and bearish products on Wednesday via the appropriately-tickered Direxion Daily Crypto Industry Bull 2X Shares (Ticker: LMBO) and Direxion Daily Crypto Industry Bear 1X Shares (REKT).
The ETF seeks to track the performance of U.S.-listed securities operating in the blockchain technology, non-fungible token, decentralized finance and digital asset mining hardware sectors. They provide daily exposure of plus-200% or minus-100% to core cryptocurrency infrastructure.
“Cryptocurrencies are one of the fastest-growing sectors in the world, currently representing a nearly $3 trillion asset class,” Edward Egilinski, managing director at Direxion, said in a press release. “LMBO and REKT provide focused exposure for traders to express short-term conviction in companies building the future of the decentralized economy centered around cryptocurrencies.”
Leveraged ETFs (exchange traded funds), such as Direxion’s latest offering, use financial derivatives and debt to amplify the daily returns of underlying securities. While traditional ETFs typically track the securities of an underlying index on a one-to-one basis, leveraged funds can target a 2:1 (or higher) ratio.
After launching in January 11 Bitcoin Bitcoin
-1.36%
ETFs are gathered Net inflows were $16.59 billion and assets under management reached $50 billion. Since then, leveraged funds have also been launched or proposed. Direxion’s latest leveraged product is the latest entry into the volatile but potentially lucrative ETF space. Last week, REX Shares and Tuttle Capital Management (aka T-Rex) Added Two ETFs are competing with BTCL and BTCZ.
“By launching a 2x leveraged and inverse spot Bitcoin ETF, we are providing traders with a powerful tool to capitalize on Bitcoin price movements more than ever before,” said Scott Acheychek, COO of REX Financial.
“T-Rex, which has a 2x and -2x spot bitcoin ETF that will challenge ProShares and VolShares, and their leveraged bitcoin ETFs are already worth about $2 billion combined,” said Eric Balchunas, Bloomberg’s chief ETF analyst. Posted on X Last week. “It just shows how good it is to get in this category now.”
What is a Leveraged ETF?
Leveraged ETFs are generally short-term investment products for experienced traders, as they carry high risk. In fact, more than half of all leveraged/inverse ETF products launched in the United States have been liquidated as of April 2022. Morningstar data.
“Leveraged ETFs have caused a lot of confusion in traditional finance… but in certain situations they also have the potential to generate enormous profits, much larger than naively assumed,” QSR analyst As stated in a recent report:. “As a result, real-world examples of leveraged ETFs have ranged from complete losses to spectacular successes.”
Over the past few years, several companies have launched single-stock leveraged funds to capitalize on the performance of market stalwarts like Apple, Nvidia, and Tesla. T-Rex’s current proposed fund will track the performance of MicroStrategy, a little-known but up nearly 250% over the past year that trades as a proxy for Bitcoin.
If the fund is approved, Balchunas said “It’s going to be the most volatile ETF the United States has ever seen. It’s the ‘ghost pepper’ of ETF hot sauce,” said Matthew Tuttle, explaining the rationale behind the fund the firm is proposing.
“We definitely think there’s a demand for it,” Tuttle said. said On Bloomberg TV. “There are a lot of perverts who like to trade this stuff.”
The Impact of Leveraged Funds on Bitcoin
With so many ETFs currently or soon to be launched on the market, could this have an impact on the price of Bitcoin?
“I don’t believe that these leveraged funds are going to increase the systemic risk to Bitcoin or the cryptocurrency markets. The funds are too small to have that kind of impact.” Louis Sykes, Chief Cryptocurrency Analyst at All-Star The chart was emailed to The Block.
“If you only read the headlines, you might think the recent funds were likely to increase market volatility,” Syke continued. “In fact, we entered a new era in the crypto market last year, characterized by audited entities, ETF exposure, and collateralized lending.”
With funds like BlackRock and Fidelity entering the Bitcoin market, Sykes said this structural trend will reduce Bitcoin’s volatility even with the presence of leveraged funds.
“(L)everaged funds are not good long-term investments because of their collapse feature, but they are a tool for skilled traders to manage short-term price risk,” Sykes said. “Most traders who participate in these funds will lose money, but this is not a new phenomenon. We see this kind of reckless behavior all the time in financial markets, but given the scale of the market, it is unlikely to cause significant harm.”
Disclaimer: The Block is an independent media outlet providing news, research and data. As of November 2023, Foresight Ventures is the largest investor in The Block. Foresight Ventures invests in other companies in the cryptocurrency space. Cryptocurrency exchange Bitget is an anchor LP of Foresight Ventures. The Block continues to operate independently to provide objective, impactful and timely information on the cryptocurrency industry. Below are the current financial disclosures.
© 2023 The Block. All rights reserved. This article is provided for informational purposes only. It is not provided or intended to be legal, tax, investment, financial or other advice.