New Leveraged Bitcoin ETFs Offer Options

Thursday saw the introduction of options on two leveraged Bitcoin ETFs, marking a new phase in crypto trading on Wall Street and adding a new layer of volatility to Bitcoin trading. Rex Shares, in collaboration with Tuttle Capital Management, launched the T-REX 2X Long Bitcoin Daily Target ETF and an inverse alternative, aiming to amplify returns for active traders seeking to profit from Bitcoin’s frequent price fluctuations.

Options are financial derivatives that derive value from an underlying asset’s price movements. They have become popular in online communities like Reddit’s WallStreetBets, where traders showcase both significant gains and losses. For instance, a $26 call option expiring on July 19 for the T-REX 2X Long Bitcoin Daily Target ETF surged 14,200% in value on Thursday, while a $25 call option expiring the same day plummeted by 99.5%.

Matthew Tuttle, CEO and CIO of Tuttle Capital Management, noted that the new products might attract a mix of retail traders and financial institutions, such as smaller hedge funds. “I think we’re going to get a lot of self-directed retail,” he said in an interview with Decrypt. “For a lot of [them], I don’t know that 1x moves [in Bitcoin] are enough to interest them that much.”

Since the introduction of Spot Bitcoin ETFs in January, there have been $15.5 billion worth of inflows this year. The SEC is currently considering options on spot Bitcoin products from asset managers like Bitwise and Grayscale, though approval has been slower due to the classification of these ETFs as securities investment vehicles.

Tuttle explained that Rex Shares’ leveraged Bitcoin ETF gets its exposure to Bitcoin prices through swaps in BlackRock’s IBIT, the leading spot Bitcoin ETF with $18 billion in assets under management. This categorization allows these leveraged products to offer options, unlike spot Bitcoin ETFs, which are still awaiting regulatory changes to permit options trading.

Investors use options for various strategies, including hedging downside risk. Trading options can also offer an income alternative to straight directional spot trading. 

However, the complexity of options trading can pose significant risks to retail traders who may not fully understand derivatives. Leveraged ETFs, introduced to U.S. markets in 2006, have grown in popularity, with 150 such ETFs now holding a collective $116 billion in assets. ProShares UltraPro QQQ is the largest among them, with $26 billion in AUM.

Among leveraged ETFs, Rex Shares’ largest product is its 2x long Nvidia ETF, with $789 million in AUM. The company has also proposed a leveraged fund for MicroStrategy, a firm known for its significant Bitcoin holdings, and is eyeing other cryptocurrencies. An Ethereum-based product is in development, and Tuttle mentioned plans to consider Solana as the next candidate once the Ethereum product is launched.

“We filed for Ethereum already, so […] we’ll be ready to go once that comes out,” Tuttle said, adding, “We’ll look at Solana too—that looks like it may be the next one.”