Micro Bitcoin

Bitcoin

Spot

Investors are dumping hundreds of millions of dollars into exchange-traded funds (ETFs) that tout 2x leveraged exposure to Bitcoin’s price volatility. They are setting themselves up for disappointment. Traders looking for a risk-on BTC bet should stay away from these funds and try out crypto futures exchanges instead.
The past week saw upwards of $100 million flow into leveraged BTC ETFs after a sharp BTC selloff sparked hopes of a similarly dramatic price rebound. Total assets in these funds now exceed $1.4 billion, and more are joining the fray. On July 10, Rex Shares launched two new ETFs designed to deliver 200% exposure to Bitcoin’s (<a href="https://cointelegraph.com/bitcoin-price">BTC</a>)&nbsp;price volatility.
Leveraged BTC ETFs appeal to those seeking as much upside from BTC’s volatility as possible with minimal upfront investment. These funds don’t 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. 
<h2 id="chronic-underperformance">Chronic Underperformance</h2>
It’s not so simple in practice. Instead of maximizing returns, leveraged ETFs chronically underperform thanks to a mix of high management fees and an inherently inefficient investment strategy. The same can be said for closely-related inverse ETFs — such as <a href="https://cointelegraph.com/news/proshares-five-etfs-indirect-bitcoin-exposure">ProShares Short Bitcoin Strategy ETF (BITI)</a> — that take bearish short positions on BTC.
Related: <a href="https://cointelegraph.com/news/bitcoins-selloff-could-put-etf-shares-discount-rack">Bitcoin’s sell-off could put ETF shares on the discount rack</a>
Maintaining a 2x leverage target day after day forces leveraged ETFs to constantly rebalance their holdings. The result is effectively a “Buy high, sell low” trading strategy, and the performance drag can be crippling. One <a href="https://www.gsr.io/reports/understanding-the-perils-and-potential-of-leveraged-etfs/" target="_blank" rel="noopener nofollow">study</a> by GSR Markets found that in volatile market conditions — when daily rebalances are largest — leveraged ETFs lag comparable strategies by more than 20%. 
<figure>
 <img src="https://s3.cointelegraph.com/uploads/2024-07/701c12a0-d8d0-4ee0-8432-1644edc97c80.jpg" alt="Stop piling into leveraged Bitcoin ETFs and consider this instead" title="">
 <figcaption style="text-align: center;">
 Leveraged ETFs underperform other strategies in volatile markets.&nbsp;Source: GSR Research
 </figcaption>
</figure>
In extreme cases, leveraged ETFs in similarly volatile markets have gone to virtually zero. For example, between 2015 and 2023, the 3x Leveraged Biotech ETF (LABU) declined by around 96% — even as its underlying S&amp;P Biotech index gained some 9.5% over the same period.&nbsp;
<figure>
 <img src="https://s3.cointelegraph.com/uploads/2024-07/fd24ea4e-c17f-4d1b-8308-164b0fabf675.jpg" alt="Stop piling into leveraged Bitcoin ETFs and consider this instead" title="">
 <figcaption style="text-align: center;">
 The 3x Leveraged Biotech ETF (LABU) dropped by some 96% while its benchmark gained around 9.5% during the same period.&nbsp;Source: GSR Research
 </figcaption>
</figure>
Making matters worse, investors often pay dearly 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 charge holders around 0.2%, by comparison.
<h2 id="nano-contracts-from-the-cme-coinbaseand-others">Nano contracts from the CME,&nbsp;Coinbase&nbsp;and others</h2>
For most investors, spot BTC ETFs — such as Franklin Templeton Digital Holdings Trust (EZBC), VanEck Bitcoin Trust (HODL) and iShares Bitcoin Trust (IBIT) — are more than sufficient for BTC exposure. But for traders seeking 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, bringing 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.&nbsp;Other options are proliferating on smaller exchanges. (As usual, you should do your own research when it comes to the best exchange for you — or you will lose money.)
Related: <a href="https://cointelegraph.com/news/spot-bitcoin-etf-inflows-654-million-over-three-days">Spot Bitcoin ETFs buy up $654M of BTC in 3 days</a>
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 upwards of 4x leverage — in theory 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 compelled to constantly 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. 
To be sure, 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. 
Even so, futures are among the few regulated products available to retail investors with the kind of exhilarating return profile that drew many people to crypto in the first place. If crypto spot market volatility isn’t enough for you, futures might be the best game in town. 
<div>
 <div style="background: rgb(239, 239, 239); border: 1px solid rgb(204, 204, 204); padding: 10px;">
 Alex O’Donnell is a senior writer for Cointelegraph. He previously founded DeFi developer Umami Labs and worked for seven years as a financial journalist at Reuters, where he covered M&amp;A and IPOs. He is also the crypto growth lead at startup accelerator Expert Dojo.
 </div>
</div>
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Stop piling into leveraged Bitcoin ETFs and consider this instead

Table of Contents

Cointelegraph

Other articles published on Jul 11, 2024

Former U.S. President Donald Trump to Headline Bitcoin 2024 Conference

BOME’s Open Positions Surge

Investors Pour Millions into Bitcoin ETFs

MoonBag, Algorand & Immutable X Battle for Investor Attention

The MoonBag Price Effect: Cosmos and Arweave Can’t Catch a Break with 900% ROI in Stage 6

European Central Bank Explores Blockchain for Digital Currency with Successful Liquidity Matching...

Join our free newsletter for daily crypto updates!