When I read the news that investors will soon be provided with the opportunity risk of buying leveraged ETFs linked to Bitcoin I was shocked. How could the SEC approve such products? I will give you 4 reasons to stay away:
The beta-slippage (or volatility decay) is enormous
Of course the filing explicitly warns that "the funds are not intended for long-term investing" then why choose an ETF vehicle which is designed for investors rather that intraday trading?
Remember that Bitcoin is much more volatile than any traditional asset or currency:
| Asset class | 3-months volatility |
|---|---|
| Bitcoin | 99.5% |
| WTI Oil | 21.6% |
| Emerging Markets Equities | 10.1% |
| Gold | 9.9% |
| Euro Equities | 8.9% |
| EURUSD | 6.7% |
| US Equities | 5.8% |
Now remember that when you take leverage to invest your performance also depends on the path to your investment price target, if your market timing isn’t perfect and BTC falls, even if it recovers the next day you won’t have recovered your initial investment.
Please see an example below for $100 initially invested, with Bitcoin initially falling before recovering to the same level for an illustration of volatility decay:
| Scenarios | Day 0 | Day 1 | Day 2 |
|---|---|---|---|
| Bitcoin spot | $15,000 | $12,000 | $15,000 |
| Daily Performance | NA | -20.0% | +25.0% |
| 2x Daily Performance | NA | -40.0% | +50.0% |
| P&L Analysis | Initial investment | Day 1 | Day 2 | Realized P&L |
|---|---|---|---|---|
| P&L unleveraged | $100 | $80 | $100 | $0 |
| P&L leveraged | $100 | $60 | $90 | $-10 |
Hidden fees
There are usually management fees built into the performance of ETFs for the replication of the product and those get bigger with the complexity (underlying + leverage), I would imagine those would be significant for a leveraged Bitcoin ETF.
Replication of Bitcoin spot performance will be poor
The ETF will not track the spot price of bitcoin but Bitcoin Futures will be used for the replication by the fund
Liquidity should be a concern
Liquidity for such product might be daily or weekly but in any case it won’t be as liquid as Bitcoin itself and you might lose some more cents on your order execution by the ETFs market makers
Steemians you have been warned!
@vlemon what do you think of those new products? The Street trying to get a slice of the crypto bonanza?
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These products are interesting and will help prices in the short term.
Nevertheless, in the end it could be the downfall of Cryptos to let the Wolf enter !
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Very good content @pytoshi! You're right on any point you've highlighted. Have you ever though to work for the SEC? Ahah just kiddin'
Anyway, "chapeau"!
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Great Advice ..But As usual bigger whales will play and bring volatility in market which indirectly will burn newbies
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