Bitcoin Rebound May Not Save a 3x Leveraged Fund

The SEC approved exchange-listing rules on Oct. 2 for proposed three-times Bitcoin and Ethereum funds from VS Trust. The funds had not begun trading as of Oct. 7, according to an amended filing.

The funds seek three times the daily performance of their respective benchmarks, before fees and expenses. The target applies to each trading day, not to the asset’s return over a month, six months or another longer period.

Daily compounding can produce results that differ from three times Bitcoin’s cumulative return. When Bitcoin falls, the fund loses assets and then reduces or adjusts its position to maintain the targeted exposure. If Bitcoin later rises, the gain applies to the fund’s smaller balance.

For example, a 20% decline followed by a 25% gain would return Bitcoin to its starting price. A fund that loses three times the daily decline would fall by 60% on the first day. A 75% gain on the remaining balance would then leave the fund below its initial value, before fees and other costs.

The SEC described a similar result in an investor bulletin. During one four-month period, an unnamed index gained about 8%, while a fund seeking three times the index’s daily return lost 53%. The example did not involve Bitcoin or the VS Trust funds.

Returns depend on the path prices take. A steady rise can produce more than three times the benchmark’s cumulative gain, while repeated rises and declines can reduce returns. The issuers warn that investors could lose their entire investment in a single day or overnight.

The funds are designed to use Bitcoin and Ethereum futures rather than hold the assets directly. Futures expire, so the funds must replace contracts as they approach maturity. Price differences between contracts with near and later expiration dates can increase or reduce returns. This can create another gap between the funds’ results and the spot prices of Bitcoin and Ethereum.

VS Trust’s amended filing dated Oct. 7 lists an annual management fee of 1.85% for each fund. Based on the filing’s assumptions, the Bitcoin fund would need a trading return of 1.98% to cover operating costs, while the Ethereum fund would need 2.78%. Those estimates include other expenses and assumed interest on collateral.

The proposed funds are identified in the filing as BITH and ETHK. The exchange-listing approval provides a route to market but does not establish a trading record or guarantee that the funds will launch.

The products would be structured as commodity pools rather than conventional exchange-traded funds governed by the Investment Company Act of 1940. The filing anticipates partnership tax reporting through Schedule K-1. Investors could receive taxable allocations without receiving cash distributions.

The funds may appeal to investors seeking amplified exposure for short periods without managing futures positions themselves. Holding shares after a loss, however, does not preserve the original exposure to Bitcoin or Ethereum. The fund recalculates its position each day based on the capital remaining in the fund.