On October 14, the SEC received a series of documents detailing math that can destroy portfolios overnight.
Volatility Shares, the issuer behind the first leveraged Bitcoin ETF, is looking to launch a series of 5x funds tied to Bitcoin, Ethereum, SolanaAnd XRP.
If approved, these ETFs would increase daily returns by a factor of five, or more precisely, reset that exposure every trading day. For traders, this means that the products don’t just amplify profits and losses; they amplify volatility itself.
Volatility Shares’ plan borrows directly from the playbook of equity leveraged funds that exploded in the 2010s, when day traders discovered they could use ETFs as casino chips.
The proposed funds, 5x BTC, 5x ETH, 5x SOL and 5x XRP, would track futures contracts, not spot markets, and rebalance daily. The mechanics sound simple enough: if Bitcoin rises 2% one day, the ETF aims to rise 10%.
But if Bitcoin falls 2%, the ETF falls 10%. That math starts over every morning, producing what’s known as volatility decay: the compounding loss that eats away returns as markets swing back and forth.
In the 5x machine
Volatility Shares suggests “5x daily” funds that do not include coins; instead, each ETF targets five times the one-day movement of its reference asset (BTC/ETH/SOL/XRP) using derivatives within a wholly owned subsidiary in the Cayman Islands.
The portfolio combines swaps, exchange-traded futures and (where useful) options, with cash and high-quality collateral, such as government bonds, placed against these trades. The advisor then rebalances the portfolio every day so that the fund starts the next trading session back at approximately 5x exposure.
Since the goal is one day at a time, the math works out: persevere through chop and you can drift away from 5x over longer windows, and even lose money in a flat tire. To maintain U.S. tax status for mutual funds, the trust reduces exposure to the Cayman Islands around each quarter end (so tracking can soften briefly during those periods).
Shares are created and redeemed in large blocks with market makers, usually for cash, allowing the ETF to maintain its net asset value under normal circumstances. Net: Think of these as intraday trading instruments built on swaps/futures, not spot coins, with daily resets and compounding doing most of the work behind the scenes.
You can see the problem in the graphs. Bitcoin is trading around $112,682 after recovering from last week’s rate-driven sell-off. Ethereum, Solana and XRP all suffered serious losses during the sell-off, and none of these assets moved like blue chips as their daily swings often exceeded 5%.
Multiply that by five, and a single bad session can wipe out weeks of gains.
The longer you hold it, the more the daily reset compound is against you. In backtests of 3x stock funds, holding just one month in a choppy market could see double-digit underperformance compared to the underlying index.
At 5x the effect speeds up brutally.
The ETF that eats itself
That is why seasoned traders consider these products as one-day bets. They are built for scalpers, not investors. Each reset introduces small glitches due to price differences and loan fees, which quickly pile up.
For example, a 5x Bitcoin ETF would need to hold futures collateral and increase exposures daily, incurring funding costs and spreads that increase with volatility. When the underlying asset moves 10-15% in a week (as Solana did in early October), the tracking error increases quickly enough to eat up most of the theoretical gains.
Still, the demand is there.
Leveraged ETFs have become something of a financial adrenaline rush for retail traders who want exposure without using margin accounts. Volatility Shares’ previous launch, the 2x Bitcoin ETF (BITX), is already trading tens of millions of dollars daily and has proven that the appetite for greater cryptocurrency exposure is real. The five declarations are the logical, if reckless, next step.
On paper, they offer traders a way to increase their conviction. In practice, they create a guaranteed wealth transfer from impatient traders to market makers who can hedge perfectly.
The SEC will carefully examine these filings. The issuer’s prospectus describes the daily leverage achieved through futures contracts on the CME, meaning there is no direct custody of Bitcoin or Ethereum. This limits operational risk, but introduces liquidity and financing fragility.
These funds can only function efficiently if the futures markets are deep and stable. If open interest rises or funding goes negative, the ETF’s internal leverage costs rise, forcing the ETF to bleed even in a sideways market.
During volatile periods, such as Bitcoin’s recent 12% return following Trump’s tariff threat, a 5x product would have gone from peak to trough of over 50% in less than a week.
History does not favor these structures. A decade of academic research shows that when daily volatility exceeds 2%, the performance gap between a leveraged ETF and its target multiple grows exponentially.
Crypto trades in multiples of that. Bitcoin’s realized volatility is hovering around 40% this quarter, and Solana’s reached 87% last week.
In that environment, a 5x ETF becomes less of an investment and more of a timing experiment, one that ends badly for almost anyone who holds on too long.
Yet the filing also shows how traditional financial engineering is absorbing crypto risk. Instead of transferring their margins to foreign exchanges, they can now gamble on the volatility of regulated brokers and retirement accounts. This is lucrative for the issuers.
Leveraged ETFs charge higher fees: Volatility Shares’ 2x BTC fund takes a 1.85% cut annually, compared to 0.25% for BlackRock’s IBIT, and benefits from the churn of short-term trading. Every rebalancing is an opportunity to collect diversified income, and every volatility cycle brings new inflows from those convinced they can time them better.
If the SEC greenlights the 5x suite, crypto markets will enter a new feedback loop. Any increase in volatility will lead to more debt flows, amplifying intraday swings and increasing liquidations in futures and spot markets.
In that sense, Volatility Shares does not invent anything new; it only bottles the chaos that already defines this market. Whether traders should touch it depends less on courage than on attention span.
