5X Leveraged Crypto ETFs Spark Controversy After Market Crash

Volatility Shares has submitted a bold set of filings to the US Securities and Exchange Commission seeking approval for 5x leveraged exchange-traded funds covering both cryptocurrency assets and major technology stocks. The proposed ETFs would track XRP, Bitcoin, Ether, Solana, alongside traditional market heavyweights including COIN (Coinbase), MSTR (MicroStrategy), TSLA (Tesla), NVDA (Nvidia), GOOG (Alphabet), and PLTR (Palantir). This aggressive approach comes despite the SEC’s continued delays on even standard 3x leveraged products, creating what Bloomberg ETF analyst Eric Balchunas described as a potentially premature regulatory gambit.

The timing of these filings appears particularly tone-deaf given recent market conditions. As Balchunas noted in his social media commentary, the applications seem to anticipate potential regulatory gaps, possibly banking on extended government shutdown scenarios that could create unusual approval windows. This strategic positioning highlights the ongoing tension between financial innovation and regulatory oversight in the rapidly evolving cryptocurrency ETF landscape, where product developers continue pushing boundaries despite clear signals of regulatory caution from the SEC.

The leveraged ETF proposals have drawn sharp criticism from prominent cryptocurrency analysts, with Scott Melker, known widely as The Wolf Of All Streets, delivering particularly scathing assessment. Melker didn’t mince words when evaluating the concept, stating bluntly that ‘offering leverage on altcoins to retail is f**king stupid. All of them.’ His criticism focused not on the underlying assets themselves—using XRP as his primary example—but on the fundamental structure of providing retail investors with amplified exposure to already volatile cryptocurrency markets.

This industry backlash gains significant credibility when viewed against the backdrop of recent market trauma. Less than a week before Volatility Shares submitted its filings, cryptocurrency markets experienced the single largest liquidation event in history. The cascade wiped out more than 1.6 million traders and evaporated over $19 billion in market value within a single day. The primary trigger for this historic collapse was identified as excessive leverage used by traders across multiple platforms, making the timing of these new leveraged product applications particularly controversial.

The SEC finds itself in a challenging position, balancing its mandate to protect investors against growing industry pressure for innovative financial products. The regulator has consistently delayed decisions on numerous cryptocurrency ETF applications, including those tracking Ripple’s XRP token, reflecting ongoing concerns about market manipulation, custody solutions, and overall market stability. The Volatility Shares filings represent a significant escalation in product complexity that could test the boundaries of the SEC’s traditional approval framework.

Beyond the immediate controversy, these applications raise fundamental questions about the appropriate level of risk exposure for retail investors in cryptocurrency markets. The proposed 5x leverage would magnify both gains and losses, potentially exposing inexperienced traders to catastrophic losses during periods of market volatility. With the memory of the recent $19 billion liquidation event still fresh, regulators must weigh the benefits of financial innovation against the demonstrated risks of excessive leverage in cryptocurrency trading.

As the debate continues, the cryptocurrency community remains divided between those who see leveraged ETFs as natural market evolution and those who view them as irresponsible financial engineering. The ultimate decision by the SEC will likely set important precedents for how regulators approach complex cryptocurrency derivatives and what protections retail investors can expect in this rapidly maturing asset class.