Defiance ETFs recently applied for a leveraged crypto ETF focused on Ethereum (ETH) rather than Bitcoin (BTC). The Defiance 2X Ether Strategy ETF, outlined in a filing with the U.S. Securities and Exchange Commission (SEC), is an ETH Futures ETF that aims to double the daily performance of the rolling CME Ether Futures Index. This means potential exaggerated gains on strong days for Ether, but also pronounced losses during market downturns. Leveraged ETFs like this can be riskier than traditional ETFs due to their volatility and tendency to underperform the assets they track over longer periods of time.
The Defiance ETFs prospectus for the new fund emphasizes that it is a different type of investment vehicle compared to most other ETFs, emphasizing the increased risk due to the use of leverage. The fund will lose money if Ether futures trade flat or see modest price increases over a period longer than a day. Defiance also recently filed for a 2X Short MSTR ETF, which is a leveraged short play on the Bitcoin development company MicroStrategy. Commentators have criticized the product as a risky investment that could lead to significant losses for investors.
ProShares also entered the fray by filing for their own 2X and -2X spot Ether ETFs shortly after Defiance made their filing. The importance of Ether futures ETFs has grown following the SEC’s approval of such products for public trading in October. With roughly a dozen asset managers applying for Ether futures ETFs after the approval of the first 2X Bitcoin futures ETF by Volatility Shares in June, the move signaled a potential shift in how the SEC views crypto ETFs, especially for Ether which historically has shown higher price volatility compared to Bitcoin.
Despite the approval of Ether futures ETFs, the initial trading volume for these products was relatively low compared to Bitcoin ETFs. This led to speculation about when the SEC might approve spot Ether ETFs, which investors are eagerly anticipating. However, experts are skeptical that Ether spot ETFs will be approved soon given the SEC’s cautious approach to crypto investment products. The approval of Bitcoin spot ETFs three months after Ether futures ETFs suggests a possible trend toward more openness to crypto ETFs in the future.
Overall, the emergence of leveraged crypto ETFs, such as the Defiance 2X Ether Strategy ETF, signals a growing interest in using leverage to amplify returns in the crypto market. While these products offer potential for higher gains on strong market days, they also come with increased risk and the potential for significant losses during market downturns. As the SEC continues to evaluate and approve different types of crypto investment products, investors will need to carefully consider their risk tolerance and investment strategy when considering leveraged ETFs like those being introduced by Defiance and other asset managers.
