SEC Approves 3x Leveraged Ethereum ETF and Bitcoin Products

The US Securities and Exchange Commission (SEC) has approved the listing structure for the first 3x leveraged Ethereum ETF and Bitcoin exchange-traded products in the US. The order allows the Cboe BZX Exchange to list six funds issued by Volatility Shares, which track Bitcoin, Ethereum, gold, silver, crude oil, and natural gas. This approval does not permit immediate trading but paves the way for the most widely used regulated crypto investment to date.

The approved funds will not hold spot assets but will seek to deliver three times the daily benchmark returns of their underlying assets, primarily through Chicago Mercantile Exchange (CME) futures. For example, a 1% rise in Ether’s price would aim to generate a 3% profit before fees. However, this leverage resets daily, meaning losses can also be amplified.

This development marks a significant shift in the SEC’s regulatory stance towards digital assets. In 2023, the SEC was still challenging Grayscale’s attempt to convert GBTC into a spot Bitcoin ETF. The approval of these leveraged products suggests a growing acceptance of regulated crypto investment vehicles, particularly those based on CME futures.

However, the 3x leveraged Ethereum ETF comes with risks, particularly regarding compounding. Over periods longer than one day, returns can deviate significantly from 3x the underlying asset’s performance. Daily rebalancing could also increase intraday spot volatility, requiring close monitoring by market makers and regulators.