Produced by | Odaily 

Author | Odaily Qin Xiaofeng

The first leveraged cryptocurrency ETF in the United States has performed below expectations in the first three days of listing.

On June 27th, Tuesday, the "2x Bitcoin Strategy ETF" issued by Volatility Shares, a US ETF issuer, officially debuted on the BZX Exchange under CBOE and began trading.

According to Odaily's monitoring, 110,000 shares were issued on the first day, with an issue price of $15, net assets of $1.65 million, and a trading volume of $5.5 million on the first day. It is the most traded cryptocurrency ETF on its first day this year. (Note: The trading volume of the Southern East English BTC futures ETF on its first day was only $830,000, and the trading volume of the Samsung Bitcoin ETF was only $98,000).

However, the trading volume of Volatility's leveraged Bitcoin ETF plummeted in the following two trading days, with daily trading volume of less than $300,000. Yesterday (29th), 21,768 shares were traded with a trading volume of $234,000. The ETF issuance has gradually increased, with current circulating shares of 370,000 and net assets increasing to $5.7 million, as shown below:

What is a leveraged Bitcoin ETF? According to the application filed by Volatility Shares with the SEC, the ETF being issued this time seeks to achieve investment results that correspond to twice the daily excess return of the S&P CME Bitcoin Futures Roll Index (referred to as the "Roll Index"). For example, if the Roll Index increases by 1% daily, the net asset value of the ETF needs to increase by 2%, and if the Roll Index decreases by 1%, the net asset value of the ETF will decrease by 2%.

The "Roll Index" is used to measure the performance of the CME Bitcoin futures market and is rebalanced daily between the near-month and next-month futures contracts. Don't worry if you don't understand, just know that the daily roll index of CME Bitcoin futures is basically the same as the CME Bitcoin futures index in terms of data and trends-both are influenced by the price movement of Bitcoin spot. See below:

Therefore, the leveraged ETF being issued this time is actually the same as the previously issued Bitcoin Futures ETF benchmark index, both of which are based on futures data.

To achieve the goal of 2 times the return, this ETF will allocate 25% of the total fund assets to establish a wholly-owned subsidiary to invest in CME Bitcoin futures (becoming long); the remaining assets will be directly invested in cash, cash equivalents, or high-quality securities, including US government securities, money market funds, corporate debt securities, etc. These assets will be used for future liquidity provision or as collateral.

According to the official website, the leveraged ETF currently holds $10.708 million worth of CME Bitcoin futures expiring on July 23rd, $626,000 worth of CME Bitcoin futures expiring on August 23rd, and $5.69 million worth of cash equivalents. In terms of proportion, the total futures position is exactly twice the net asset value of the fund, which can meet the risk requirements for double leverage exposure.

However, I still believe that the market size of this leveraged ETF will not grow significantly.

Firstly, the issuance nodes are not good, and homogeneous products lack outstanding highlights. The 2x leveraged ETF is essentially a futures ETF, and the US market has already issued multiple Bitcoin futures ETFs, such as ProShare, VanEck, Valkyrie, and Hashdex, in the past two years. CME has also launched Bitcoin futures early on. Volatility Shares, as a latecomer, seems a bit mediocre and does not have much of a first-mover advantage, as can be seen from the trading volume in the past two days.

Furthermore, management fees are an important factor directly affecting investors' choices, and Volatility Shares' management fees are relatively high among a multitude of ETFs. According to Odaily's statistics, the current highest management fee in the ETF market belongs to Nanshan Dongying's Bitcoin futures ETF, which reaches 2%. ETFs launched in the US and Canada in the past two years generally have management fees of around 1%. Volatility Shares' management fee of 1.85% is indeed not attractive.

Finally, the failure cases of leveraged ETFs in the past also serve as a warning for Volatility Shares. As early as April 16, 2021, the world's first crypto leverage ETF - Beta Pro Bitcoin ETF (code: HBIT) was listed on the Toronto Stock Exchange. After going online, the ETF performed poorly in the market, with an average daily trading volume of only 5,769 shares (trading amount of $100,000) in the past year and total assets under management of only $3.76 million. In mid-April this year, the issuer, Horizons, ultimately closed the ETF.

While there are certainly limitations to the Canadian financial market itself, it also verifies that leveraged ETFs do not have high development potential, especially forComparing the two spot ETFs launched in Canada - Purpose BTC Spot ETF ($85.13 million) and 3iQ BTC Spot ETF ($77.95 million), it is sufficient to prove that spot ETFs for cryptocurrencies are more attractive to investors. This is also the reason why traditional investment institutions such as BlackRock, Fidelity, ARK Investment, etc. are all rushing to apply for Bitcoin spot ETFs.