The US Securities and Exchange Commission (SEC), that paragon of financial wisdom, dispatched stern missives to several exchange-traded fund (ETF) providers, halting applications for leveraged ETFs that offer more than 200% exposure to the underlying asset. A move as graceful as a bull in a china shop, yet with the subtlety of a sledgehammer. 🚨
ETF issuers Direxion, ProShares, and Tidal, those stalwarts of financial innovation, received letters from the SEC citing legal provisions under the Investment Company Act of 1940. One might say the SEC is playing the role of a strict schoolmaster, reminding these ETFs that their antics are not tolerated. 🎓
The law caps exposure of investment funds at 200% of their value-at-risk, defined by a “reference portfolio” of unleveraged, underlying assets or benchmark indexes. The SEC said:
“The fund’s designated reference portfolio provides the unleveraged baseline against which to compare the fund’s leveraged portfolio for purposes of identifying the fund’s leverage risk under the rule.”
The SEC directed issuers to reduce the amount of leverage in accordance with the existing regulations before the applications would be considered, putting a damper on 3-5x crypto leveraged ETFs in the US. A damper so heavy, it could double as a weight for a gym enthusiast. 💸
SEC regulators posted the warning letters the same day they were sent to the issuer, in an “unusually speedy move” that signals officials are keen on communicating their concerns about leveraged products to the investing public, according to Bloomberg. Speedy? More like a racehorse with a hangover. 🐴
The crypto market took a nosedive in October after a flash crash caused $20 billion in leveraged liquidations, the most severe single-day liquidation event in crypto history, sparking discussions among analysts and investors over the dangers of leverage and its effect on the crypto market. A reminder that leverage is a double-edged sword, but in crypto, it’s more like a triple-edged chainsaw. 🔪
Leverage in crypto heats up, amplifying gains, losses, and suppressing markets
“Leverage is clearly out of control,” analysts at The Kobeissi Letter said in response to the SEC warning letters. A sentiment as clear as mud, but with more profit margins. 🧽
Crypto liquidations have nearly tripled this market cycle, according to crypto analysis platform Glassnode. A tripling so rapid, it’s like watching a toddler’s growth spurt. 📈
Liquidations in the crypto futures market during the last cycle averaged about $28 million in long positions and $15 million in shorts per day. A daily spectacle of financial despair. 😭
The current cycle is clocking about $68 million in long liquidations and $45 million in short liquidations daily, according to Glassnode. A daily feast for the liquidation gods. 🍖
Demand for leveraged crypto ETFs surged following the 2024 presidential election in the United States, in anticipation of a better regulatory climate for crypto in the US. A hope as fleeting as a candle in a hurricane. 🌪️
Leveraged ETFs are not subject to margin calls and automated liquidations like leveraged crypto derivatives, but can still deal a serious blow to investor capital in a bear market or even a sideways market, as losses compound more quickly than gains. A financial tightrope walk with a net made of bubblegum. 🎭
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2025-12-03 22:07