Faced with the new crypto fever, the SEC intervenes to firmly curb the speculative excesses of the global market. By targeting extremely leveraged crypto ETFs, the regulator warns that the era of uncontrolled x5 products is ending. Between regulation of innovation and protection of investors, a new red line is emerging in the global crypto ecosystem.
In brief
- The SEC warns issuers of crypto ETFs offering up to x5 of exposure, deeming this level of leverage excessive and dangerous.
- In a context of flash crashes and record liquidations, the regulator wants to limit the systemic impact of leverage that has become uncontrollable on the crypto markets.
- Leveraged ETFs remain authorized, but within a stricter framework where investor protection and risk control take precedence over speculation.
A sudden brake on the riskiest crypto ETFs
The Securities and Exchange Commission (SEC), which plans to introduce a new framework dedicated to crypto innovation, has decided to sound the alarm. It issued warning letters to several ETF issuers, including Direxion, ProShares and Tidal, after filing requests for leveraged funds of up to five times the exposure to the underlying asset, a level deemed simply excessive by the regulator.
Based on the Investment Company Act of 1940, the SEC sets the maximum exposure authorized at 200% only. Concretely, any ETF offering more than twice the performance or loss of an asset violates the regulations. The files will therefore have to be revised downwards before hoping for validation.
What is striking is the speed of execution: the letters were published the same day they were sent. A rare and almost symbolic gesture, by which the SEC warns industry and savers of uncontrolled speculative excesses.
Lever, engine of profits and chain explosions
This warning comes in a context of strong tension on the crypto markets. In October, a flash crash led to more than 20 billion liquidations, an unprecedented record for derivatives products. A brutal reminder that leverage, while it multiplies gains, especially amplifies losses exponentially.
According to Glassnode, liquidations in crypto futures markets have tripled since the previous bull cycle. Long liquidations increased from 28 to 68 million, shorts also jumped from 15 to 45. These figures reflect a rise in speculation that is now systemic.
The Kobeissi Letter analysts do not beat around the bush: “The lever is clearly out of control. » And for good reason: the more volatility accelerates, the more leveraged products become time bombs. Each correction turns into a chain reaction where automatic liquidations pull prices even lower, until causing a self-sustaining crash.
Leveraged crypto ETFs: false security for investors
Since the 2024 US presidential election, hopes for a more favorable regulatory climate have boosted demand for leveraged crypto ETFs. Many investors saw it as a “safer” alternative to traditional derivative products: no margin calls, no forced liquidation, and simplified exposure via traditional stock markets.
But this security is partly illusory. Because even without automatic liquidation, losses accumulate just as quickly, or even faster, in a bearish or simply stagnant market. The daily rebalancing mechanism specific to these ETFs gradually erodes performance, transforming a short-term bet into a slow hemorrhage of capital.
In short, leveraged ETFs “package” risk, they do not eliminate it. The SEC's decision therefore amounts to placing the market in a more rational framework, far from the promises of profits multiplied by five which attract novices and worry institutions.
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