This week, Direxion has introduced two new high-risk leveraged funds targeting the cryptocurrency market. Known for its leveraged ETFs, Direxion has launched the Direxion Daily Crypto Industry Bull 2X Shares (LMBO) and the Direxion Daily Crypto Industry Bear 1X Shares (REKT). These ETFs aim to provide 200% or -100% daily exposure to U.S.-listed companies involved in blockchain technology, NFTs, decentralized finance, and digital asset mining.
“Crypto equities are among the fastest-growing companies in the world, now representing nearly a $3 trillion asset class,” said Edward Egilinsky, Managing Director at Direxion. “LMBO and REKT give traders a focused way to express their short-term views on companies building a decentralized, crypto-driven economy.”
Leveraged ETFs use financial derivatives and debt to amplify the daily returns of an underlying security. Unlike traditional ETFs that track indices on a one-to-one basis, leveraged ETFs aim for higher ratios, such as 2:1.
Since January, Bitcoin ETFs have seen a surge in interest, with $16.59 billion in net inflows and $50 billion in assets under management. Direxion’s new products are the latest in a series of leveraged funds, following the recent launch of BTCL and BTCZ by REX Shares and Tuttle Capital Management.
“By launching 2X leveraged and inverse Spot Bitcoin ETFs, we’re providing traders with powerful tools to capitalize on Bitcoin’s price swings,” said Scott Acheychek, COO of REX Financial.
Bloomberg Senior ETF Analyst Eric Balchunas pointed out that these new leveraged ETFs will compete with ProShares and VolShares, whose leveraged Bitcoin ETFs currently manage around $2 billion combined.
What Are Leveraged ETFs?
Leveraged ETFs are designed for short-term trading by experienced investors due to their high risk. Morningstar data shows that over half of all leveraged/inverse ETF products launched in the U.S. had been liquidated by April 2022.
“Leveraged ETFs have generated significant debate in traditional finance, but they also have the potential for substantial gains under specific conditions,” noted analysts from QSR. “There have been examples of both complete losses and remarkable successes.”
Recently, some firms have introduced single-stock leveraged funds to capitalize on the performance of major companies like Apple, Nvidia, and Tesla. T-Rex has proposed a fund to track the 2X performance of MicroStrategy, a company closely associated with Bitcoin.
“If approved, this would be the most volatile ETF seen in the U.S. to date,” said Matthew Tuttle, explaining the rationale behind the proposed fund.
Impact on Bitcoin
With the growing number of ETFs, their potential impact on Bitcoin’s price is a topic of discussion.
“I don’t think these leveraged funds will increase systemic risk to Bitcoin or the crypto market. They’re too small to have that kind of impact,” said Louis Sykes, a senior crypto analyst with All-Star Charts.
Sykes noted that despite headlines suggesting increased market volatility, the crypto market has entered a new era with audited counterparties, ETF exposure, and collateralized lending. The entry of major funds like BlackRock and Fidelity is expected to reduce Bitcoin’s volatility, even with the presence of leveraged funds.
“Leveraged funds have a decay function, making them unsuitable for long-term investments but useful for managing short-term price risks for skilled traders,” Sykes said. “Most traders engaging with these funds will incur losses, but this behavior is common in financial markets and unlikely to pose significant risk given the size of these funds.”
