How Bitcoin Leveraged ETFs Work

The Rise of Bitcoin ETF’s

As Bitcoin gains more attention, we see trading behaviors move toward risk-on with leveraged ETF’s gaining in popularity among retail traders. In this article we take a look at what leveraged ETF’s and how they work.

How Leveraged ETFs Work

In a 2x strategy the ETF aims to return 200% of the daily performance of the underlying asset or index. For Example: if Bitcoin Rises 3% then the ETF would return 6%. Additionally, if the Bitcoin were to fall by 3 % then the ETF would return a -6%. The ETF achieves this by using leveraged instruments or borrowed money to gain additional exposure.

Typically, the ETFs are rebalanced daily though this is not a rule. This means that the leverage is recalculated and reset at the end of each trading day to match their stated objective. These types of ETFs favor short term holding and trading strategies as the losses and gains can track away from the underlying asset. Here is an example;

         Day 1

Bitcoin Movement: -10%
If Bitcoin starts at 100, it moves to 100×(1−0.10)=90100 \times (1 - 0.10) = 90100×(1−0.10)=90.

2x Leveraged ETF Movement: −10%×2=−20%-10\% \times 2 = -20\%−10%×2=−20%
The ETF price moves to:
100×(1−0.20)=80100 \times (1 - 0.20) = 80100×(1−0.20)=80.

         Day 2

Index Movement: +10%
Bitcoin moves from 90 to:
90×(1+0.10)=9990 \times (1 + 0.10) = 9990×(1+0.10)=99.

2x Leveraged ETF Movement: +10%×2=+20%+10\% \times 2 = +20\%+10%×2=+20%
The ETF price moves from 80 to:
80×(1+0.20)=9680 \times (1 + 0.20) = 9680×(1+0.20)=96.

In this example an opening order of 100 dollars with a 10% loss followed by a 10% gain shows a net 4% loss due to the nature of the rebalancing. Additionally fees associated with leveraged ETFs tend to be higher as they require more attention than standard ETFs.

Conclusion

Timing is key to the effectiveness of this type of investment and when executed correctly, returns can quickly outpace outright ownership of the underlying asset. High market volatility can significantly impact returns due to the compounding effect. Ultimately it is up to you to decide what is a good fit for your investment style and needs. Finance is Fun! See you at the top.