Leveraged Bitcoin ETFs Are a Disappointment. Try Crypto Futures Exchanges Instead

Investors are dumping hundreds of millions of dollars into exchange-traded funds (ETFs) that tout 2x leveraged exposure to Bitcoin's (BTC) price volatility.

Investors are piling hundreds of millions of dollars into exchange-traded funds (ETFs) that claim to offer 2x leveraged exposure to Bitcoin’s ( BTC ) price volatility. They are setting themselves up for disappointment. If you're looking for a risk-on BTC bet, stay away from these funds and check out crypto futures exchanges instead.

After a sharp selloff in BTC sparked hopes of an equally dramatic price rebound, the past week saw an influx of nearly $100 million into leveraged BTC ETFs. These funds now hold over $1.4 billion in total assets, and more are joining the fray. On July 10, Rex Shares launched two new ETFs designed to provide 200% exposure to BTC’s price volatility.

These leveraged BTC ETFs are designed to appeal to those seeking to maximize upside from BTC’s volatility with minimal upfront investment. However, these funds do not actually hold BTC. Instead, they use derivatives to double down on BTC price exposure. In theory, a 2x leveraged BTC position should return $2 for every $1 gain in BTC’s spot price.

Chronic underperformance

In practice, it’s not that simple. Instead of maximizing returns, these leveraged ETFs have chronically underperformed due to a combination of high management fees and an inherently inefficient investment strategy. The same can be said for closely related inverse ETFs — like the ProShares Short Bitcoin Strategy ETF (BITI) — that take bearish short positions on BTC.

Maintaining a 2x leverage target on a day-to-day basis forces leveraged ETFs to continuously rebalance their holdings. The result is effectively a “Buy high, sell low” trading strategy, and the performance drag can be crippling. One study by GSR Markets found that in volatile market conditions — when daily rebalances are largest — leveraged ETFs lag comparable strategies by more than 20%.

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In extreme cases, leveraged ETFs in similarly volatile markets have gone to nearly zero. For instance, between 2015 and 2023, the 3x Leveraged Biotech ETF (LABU) declined by around 96% — even as its underlying S&P Biotech index gained some 9.5% over the same period.

To make matters worse, investors often pay through the nose for the privilege. The most popular leveraged BTC ETF — Volatility Shares’ 2x Bitcoin Strategy ETF (BITX) — charges management fees of 1.85%. Spot BTC ETFs, by comparison, charge holders around 0.2%.

Nano contracts from the CME, Coinbase and others

For most investors, spot BTC ETFs — like the Franklin Templeton Digital Holdings Trust (EZBC), VanEck Bitcoin Trust (HODL) and iShares Bitcoin Trust (IBIT) — are more than enough for BTC exposure. But for traders looking for risk-on strategies to amplify potential gains, crypto futures exchanges are the best option.

Trading crypto futures has never been easier. In 2022, Coinbase Derivatives Exchange launched in the United States, offering crypto futures — including the retail-friendly nano Bitcoin and nano Ether contracts — to Coinbase’s tens of millions of American users. The Chicago Mercantile Exchange (CME) launched a similar product, Micro Bitcoin Futures, in 2021. Other options are also available on smaller exchanges. (As always, you should do your own research when it comes to the best exchange for you — or you will lose money.)

Futures contracts are standardized agreements to buy or sell an underlying asset at a future date. They trade on public exchanges and are far more flexible and cost efficient than leveraged ETFs. In the case of nano Bitcoin, Coinbase traders can take positions with up to 4x leverage — theoretically earning $4 for every $1 gain in the spot price — in increments of 1/100th of a Bitcoin and with as little as $130 in initial capital.

Unlike leveraged BTC ETFs, traders are not necessarily forced to continuously rebalance. In other words, holding a 2x leveraged nano Bitcoin contract until expiration (expiry) might actually approximate 2x BTC price exposure. The same cannot be said for leveraged ETFs.

Of course, futures trading comes with its own complexities and risks. For one, futures are not "set and forget." Most contracts expire after one month, so must be regularly rolled over. They are also, as the name implies, futures, and thus reflect market expectations of BTC’s spot price by the end of the current month, at the earliest.

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此處表達的觀點、想法和意見僅代表

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