Levered Bitcoin ETF provides long-term bid on SEC as crypto rally
(Bloomberg) — An issuer of exchange-traded funds is trying its hand at a delivered Bitcoin futures product as digital assets try to stage a recovery after last year’s brutal flops.
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The 2x Bitcoin Strategy ETF by Volatility Shares will attempt to double the performance of the S&P CME Bitcoin Futures Daily Roll Index each day, according to a filing. The fund will have a total expense ratio of 1.89% and will trade under the ticker BITX.
The application lands at a time when cryptocurrencies are rebounding from a series of devastating failures last year. Bitcoin is up about 70% so far in 2023, but at $28,500 it’s still trading well below its 2021 high of nearly $69,000. Additionally, market watchers say, past precedents don’t bode well for the approval of funded crypto funds.
“This should be approved, but I don’t think it will be,” said Athanasios Psarofagis of Bloomberg Intelligence, noting that the Securities and Exchange Commission rejected similar offers in the past. The agency declined to comment on Volatility Shares’ filing.
A Bitcoin futures ETF has been around since 2021, although the SEC has been hesitant to approve a physical-backed fund. More complex derivatives ETFs have also been taboo in the past. Direxion, a financial products provider known for its leveraged ETFs, withdrew an application for a bearish Bitcoin fund that same year, and issuer Valkyrie also dropped plans for a leveraged product based on the coin.
The industry is hyper-focused on Grayscale Investments’ campaign to convert Bitcoin Trust (ticker GBTC) into an ETF, which some market watchers say has a good chance of happening. But the SEC may not greenlight many Bitcoin derivative products until the outcome of that case is known, according to Psarofagis.
“I don’t see them doing anything until it’s over,” he said.
In 2018, the SEC also rejected a number of proposals by Direxion for leveraged Bitcoin products – including for 2x bear and bull funds – although the crypto sector has changed drastically since then.
Regulators are in the midst of a crackdown on the crypto space, handing out enforcement actions and lawsuit after lawsuit as they try to stamp out what they see as malfeasance in the industry. The moves follow a price crash last year that saw Bitcoin lose 64% and Ether, the second-largest crypto, fall more than 67%, on the heels of the implosions of a number of once-lauded projects, including the collapse of the FTX exchange.
“The rejection of previously leveraged funds — and less than 2x — doesn’t bode well,” said Todd Sohn, ETF strategist at Strategas Securities. On the other hand, he noted that at least the fund uses an index from a well-known provider, S&P.
And with previous denials occurring a year and a half ago, Sohn said it’s possible “the clean slate has made the SEC more comfortable — despite all the notable figures who recently fell on their swords.”
–With assistance from Katie Greifeld.
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