A new Bitcoin ETF is risky and declares it. A chilling warning.

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Warren Buffett described Bitcoin as probably rat poison, squared. He would probably find the math on this new exchange-traded fund even scarier.

The new product is the Volatility Shares 2x Bitcoin Strategy ETF (ticker: BITX). The fund, which began trading on Tuesday and has a high expense ratio of 1.85%, seeks to achieve twice the daily performance of a Bitcoin futures index. These contracts tend to closely mimic the price of Bitcoin. So, in theory, the fund should go up, say, 2% when the price of the token goes up 1%.

The fact that the product exists comes as a shock to many fund watchers. The Securities and Exchange Commission in 2021 allowed the first Bitcoin-related product, ProShares Bitcoin Strategy (BITO), to hit the market. The fund, which invests in Bitcoin futures, quickly amassed $1 billion in assets.

However, the agency denied attempts by fund companies to launch ETFs that hold Bitcoin in cash, citing insufficient fraud monitoring on crypto trading platforms. The SEC also recently sued Coinbase (COIN) and Binance, among other crypto platforms, for allegedly acting outside the law.

Given the agencies’ general skepticism towards crypto, some pundits were surprised when Volatility Shares, a lightly-watched leveraged Bitcoin futures ETF, hit the market.

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It’s absolutely ridiculous that a 2x Bitcoin futures ETF would launch before a Bitcoin spot ETF, said Nate Geraci, president of The ETF Store, a consulting firm.

For investors, buying a leveraged ETF let alone a leveraged ETF tied to an already volatile asset like Bitcoin comes with a unique set of risks.

First, the ETF only seeks to double the performance of Bitcoin futures in a single day. Over longer time frames, the fund is unlikely to track Bitcoin’s performance twice.

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The reason is basic math. If Bitcoin fell 10% on Thursday and rose 10% on Friday, the token would almost return to where it started down 1%. A $100 investment in a double-leveraged ETF would lose 20% on the first day, at $80, and gain 20% on the second, at $96, a drop of 4%, instead of the 2% an investor might expect.

Combine that fact with Bitcoin’s notorious volatility, and over long periods, many investor purchases will be devalued, Geraci said.

The vast majority of investors shouldn’t touch this ETF with a 10-foot pole, Geraci said.

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A Volatility Shares spokesperson declined to comment.

Volatility Shares discloses these risks in the fund’s prospectus and other documents. The company notes that for periods longer than one day, the fund could lose money even if the level of the index rises.

An investor in the Fund could potentially lose the full value of their investment in a single day, the prospectus says.

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As shocking as it may sound, it’s not the only ETF to feature this language, and some of the pitfalls of a leveraged fund can be avoided by investors willing to constantly monitor their portfolio and rebalance it if necessary. .

But the vast majority of investors, even those who believe in Bitcoin, should take this warning to heart.

Email Joe Light at [email protected]

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