Leveraged Crypto Funds Face Volatility Decay Amid Sustained Drawdowns

The ProShares Ultra Ether ETF (ETHT) has experienced substantial declines, with a year-to-date loss of 79%. This downturn is attributed to volatility decay and futures roll costs, which are inherent risks associated with daily-reset leveraged funds. The fund's structure exacerbates losses during prolonged drawdowns.

On June 5, ETHT plummeted by 23%, mirroring a 10% decline in the underlying ether price. This discrepancy highlights the impact of volatility decay and futures roll costs on the fund. The arithmetic behind a leveraged crypto wrapper becomes increasingly detrimental during a sustained downturn.

The recent SpaceX IPO may contribute to further declines, as retail investors are compelled to rotate out of speculative positions. This rotation could intensify if the deal prices well and trades smoothly, potentially draining capital from the crypto market. Weekly ETF flow data will provide insight into whether marginal holders are capitulating or accumulating.