Crypto: The SEC Slows Down 3x–5x Leveraged ETFs

Faced with the new crypto fever, the SEC intervenes to firmly curb speculative excesses in the global market. By targeting extreme leveraged crypto ETFs, the regulator warns that the era of uncontrolled x5 products is coming to an end. Between regulating innovation and protecting investors, a new red line is being drawn in the global crypto ecosystem.

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 sent warning letters to several ETF issuers, including Direxion, ProShares, and Tidal, after the filing of leveraged fund applications that could offer exposure up to five times the underlying asset, a level deemed simply excessive by the regulator.

Relying on the Investment Company Act of 1940, the SEC sets the maximum exposure allowed at only 200%. In practice, any ETF offering more than twice the performance or loss of an asset violates the regulations. The proposals will therefore have to be scaled back before hoping for approval.

What strikes is the speed of execution: the letters were published on the same day they were sent. A rare and almost symbolic move by which the SEC warns industry and savers of uncontrolled speculative abuses.

Leverage, engine of profits and chain reactions

This warning comes amid high tension in crypto markets. In October, a flash crash caused more than $20 billion in liquidations, an unprecedented record in derivatives. A brutal reminder that leverage, while multiplying gains, especially amplifies losses exponentially.

According to Glassnode, liquidations in crypto futures markets have tripled since the previous bullish cycle. Long liquidations rose from 28 to 68 million, shorts also jumped from 15 to 45 million. These figures reflect a rise in systemic speculation.

Analysts from the Kobeissi Letter don’t mince words: “Leverage 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 push prices even lower, eventually causing a self-reinforcing crash.

Leveraged crypto ETFs: a false security for investors

Since the 2024 U.S. presidential election, hopes for a more favorable regulatory climate have boosted demand for leveraged crypto ETFs. Many investors saw them as a “safer” alternative to traditional derivatives: no margin calls, no forced liquidations, and simplified exposure through traditional stock markets.

But this security is partly illusory. Because even without automatic liquidation, losses accumulate just as quickly, if not faster, in a bear or merely stagnant market. The daily rebalancing mechanism specific to these ETFs progressively erodes performance, turning a short-term bet into a slow hemorrhage of capital.

In short, leveraged ETFs “package” the risk, they do not eliminate it. The SEC’s decision thus reinstates the market within a more rational framework, far from the fivefold gain promises that attract novices and worry institutions.