Home / How to Use the Volatility Shares 2x Bitcoin Strategy ETF — First SEC Approved Leveraged ETF
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How to Use the Volatility Shares 2x Bitcoin Strategy ETF — First SEC Approved Leveraged ETF

Published June 26, 2023 9:37 PM
Teuta Franjkovic
Published June 26, 2023 9:37 PM
Key Takeaways
  • The first leveraged Bitcoin Futures ETF in the US has been approved by the SEC
  • The fund seeks to benefit from increases in the price of Bitcoin Futures Contracts, but will not invest directly in Bitcoin
  • BTC’s price increased, while velocity decreased

The first leveraged Bitcoin futures exchange-traded fund (ETF) has been approved by the U.S. Securities and Exchange Commission (SEC) as of last week. On Tuesday, June 27, Volatility Shares 2x Bitcoin Strategy ETF (BITX) is set to debut on the Chicago Board Options (CBOE) BZX Exchange.

In its SEC filing, BITX stated that it “seeks investment results that correspond to two times (2x) the return of the Chicago Mercantile Exchange (CME) Bitcoin Futures Daily Roll Index.”

Leveraged ETF: High Rewards With High Leverage

To put things in perspective, an ETF, or Exchange Traded Fund, is a kind of investment vehicle that monitors the performance of particular assets. The BITX ETF is concentrated on Bitcoin here.

This ETF stands out due to its leveraged strategy, which aims to multiply Bitcoin gains by two. Financial derivatives and other tools are used to achieve this leverage. Thus, both price increases and decreases for Bitcoin could be profitable for investors.

This futures-based ETF’s registration is a direct response to market movements, with BlackRock’s initiative to launch Bitcoin Spot ETFs receiving significant attention. The largest asset management company in the world, manages assets worth over $10 million. Notably, the investing firm’s iShares division houses the BTC ETF.

Why Is a Bitcoin ETF Necessary – How to Use Leverage ETFs?

The majority of average retail investors still view Bitcoin and cryptocurrencies in general as dangerous.

Owning Bitcoin entails maintaining a Bitcoin wallet and having faith in crypto exchanges, which are still new ground for anyone unfamiliar with the field and necessitate some amount of self-education. Additionally, there are no clear regulations surrounding them.

Investors don’t have to be concerned about private keys, storage, or security when using a Bitcoin ETF. They may access the cryptocurrency market without going through the hassle of buying and holding cryptocurrencies because they own shares in the ETF just like they own shares of stock.

And to put it simply, both skilled institutional investors and many average people find that to be a very alluring prospect.

Leveraged ETFs operate differently from standard ETFs because they aim to increase daily returns of a benchmark index by a factor of two or three rather than merely matching the index’s performance. Leveraged ETFs acquire derivatives, such as futures contracts and option contracts, with borrowed funds to increase returns.

A leveraged ETF aims to produce a daily return that is a multiple of the performance of a certain index. Leveraged ETFs can also have inverse exposure, which means that if the index declines, the ETF will rise.

Traders who want to bet on an index or profit from the index’s recent surge frequently employ leveraged ETFs. Leveraged ETFs are rarely used as long-term investments because of their high-risk, high-cost nature.

Options contracts, for instance, are typically traded in the short term and have expiration dates. Because the derivatives used to create the leverage are not long-term assets, it is challenging to hold long-term investments in leveraged ETFs. Leveraged ETF returns may diverge significantly from the underlying index if held for extended periods of time.

Currently, U.S. investors have access to Bitcoin futures ETFs, which invest in contracts to purchase or sell the commodity at a future date for a predetermined price. However, the eagerly anticipated Bitcoin spot ETF would make direct investments in the virtual currency.
According to analysts , the financial services sector may advise investors to keep their portfolio exposure to “high-risk assets” like Bitcoin to 1% to 5%.

What Happens With BTC Price?

According to Chief Investment Officer of Volatility Shares, Stuart Barto n, the regulator has not rejected the application for the 2x ETF, clearing the way for its introduction on the upcoming Tuesday.

He said it’s fascinating to see digital assets packaged as an ETF, and added that customers can now get exposure to Bitcoin by investing as little as half the value with a leveraged 2x ETF.

According to a prospectus filing, the ETF will track the CME Bitcoin Futures Daily Roll Index.

The price of Bitcoin has been on the rise as a result of recent events, despite the fact that the future of regulation and its effects on altcoins are still uncertain.

The price of Bitcoin can fluctuate significantly within a single day in both directions. As an illustration, from January 2014 to the present, the popular ProShares UltraPro S&P 500 (UPRO), a 3x leveraged ETF, has actually been less volatile than Bitcoin.

Additionally, it has been subjected to multiple lengthy and severe declines known as “Crypto Winters”. The longest one had a 73.81% drawdown and would have left an investment underwater for 2 years and 10 months if it had occurred from January 2018 to October 2020.

For day traders and swing traders, a 2x leveraged ETF is designed to be a short-term holding. Longer-term purchase and holding of such an ETF would be crazily risky, especially in light of the fact that the 2x leverage objective is only reliable for a single day.

BTC’s price at the time of writing was $30,374. Following BlackRock’s disclosure, it recently saw a big increase in price.

However, there was a discernible drop in the speed of Bitcoin transactions. As people kept onto their BTC during this time, it showed less trading activity.

Rising Concerns

The majority of Bitcoin supporters in the market applauded today’s news, although it did raise some concerns.

“This will be one of the most absurd features of the Bitcoin ETF tale in 5 or 10 years… a plain spot ETF launches before a 2x leveraged futures product, according to Nate Geraci, co-founder of the ETF Institute, on Twitter. He concluded his tweet with the word “Wild.”

https://twitter.com/NateGeraci/status/1672276942039445514?s=20 

Others noted  that $BITO, the first Bitcoin futures ETF in the United States, has lagged BTC year-to-date despite rising on today’s announcement relative to its USD pair. According to Yahoo Finance, the asset saw a 3.45% increase on the day, rising to $17.57; nevertheless, it is still down more than 50% from its all-time high of $43.32 in 2021.