For months, crypto enthusiasts have invested billions into leveraged strategies, betting that Donald Trump’s presidency would eliminate regulatory barriers and usher in a prosperous era for digital currencies. However, with the market downturn and mounting concerns over Trump’s volatility-inducing policies, day traders who had hoped for rapid growth are now facing steep losses.
The Struggles of Leveraged ETFs
Among the most significant losers in the market are exchange-traded funds (ETFs) that amplify returns on virtual currencies or crypto-linked themes. Two ETFs, in particular, which focus on leveraged bets on MicroStrategy (now known as Strategy) and Bitcoin, plummeted more than 30% in a single day. These funds, designed to capitalize on the cryptocurrency boom, are feeling the effects of broader economic uncertainties and disappointing industry policies from the Trump administration.
Other funds, including those tied to Robinhood Markets Inc., a popular brokerage among crypto traders, also faced losses of up to 40%. Leveraged Bitcoin ETFs saw a 20% drop, while Ether-based funds saw a 26% decline, reflecting a broader selloff in the digital assets market.
Expectations vs. Reality of Trump’s Crypto Policies
Trump’s administration initially sparked hope in the crypto market with promises to embrace the industry, including the creation of a strategic reserve of digital tokens and the launch of his own memecoin. Bitcoin and other cryptocurrencies soared following the election, but the subsequent policy actions have left many industry insiders disillusioned.
Recent developments, such as the announcement that lesser-known tokens like XRP, SOL, and ADA would be included in the strategic reserve, have met with dismay. Additionally, a White House crypto summit, which was expected to offer meaningful insights, turned out to be a public relations exercise rather than a substantive policy discussion. These developments have left many in the crypto world in a state of uncertainty, waiting for more concrete actions.
Broader Market Concerns Weighing on Crypto
The downturn in cryptocurrency prices is compounded by broader economic concerns, particularly fears of a potential recession. JPMorgan and Goldman Sachs models show increasing probabilities of an economic slowdown, raising concerns about speculative investments in high-risk assets like cryptocurrencies.
In this environment, leveraged ETFs are facing significant challenges. Todd Sohn, a senior ETF strategist at Strategas, advises that investors are pulling back from high-beta assets, and the high volatility of these leveraged ETFs only amplifies the risk.
The Impact of Trump’s Policies on Speculative Assets
Trump has acknowledged that the market volatility could be part of a “transition” phase as his new policies take effect. However, market strategists note that speculative investments, especially in crypto and high-tech sectors, are being aggressively unwound. Michael O’Rourke, chief market strategist at JonesTrading, points out that the rapid rise of these speculative assets should have signaled the potential for an equally fast collapse.
The sharp drops in leveraged funds, such as those tied to MicroStrategy and Bitcoin, underscore the risk involved in crypto-linked investments. The two leveraged ETFs tied to the company formerly known as MicroStrategy have lost around 45% this year. Similarly, the GraniteShares 2x Long COIN Daily ETF, linked to Coinbase, has lost more than 55% since the end of 2024.
The Decline of High-Tech and Musk-Linked ETFs
Beyond crypto, other speculative ETFs tied to high-tech and Musk-related stocks are also struggling. For example, the Direxion Daily TSLA Bull 2X Shares, which tracks Tesla’s volatility, has lost over 70% of its value this year, reflecting the decline in Tesla’s stock. Similarly, funds linked to Palantir Technologies have dropped by around 20% in a single day.
Cathie Wood’s ARK Innovation ETF, which has been closely associated with Musk’s tech ventures, is down 16% year to date, and investors have pulled approximately $240 million from the fund. This comes after two consecutive years of outflows totaling almost $4 billion, reflecting broader concerns over the future of speculative tech stocks.
The Future of Crypto and High-Risk Assets
Despite the challenges, some analysts remain optimistic about the long-term potential of cryptocurrencies, citing the pro-crypto stance of the current administration. However, as Roxanna Islam, head of sector and industry research at TMX VettaFi, notes, the pricing of cryptocurrencies remains heavily influenced by sentiment rather than rationality. With growing concerns about the broader market, it’s difficult for investors to maintain faith in high-risk assets like cryptocurrencies.
As the market continues to adjust to the realities of Trump’s policies and broader economic uncertainty, crypto day traders and speculative investors will need to navigate a volatile landscape. The future of digital assets remains uncertain, with many looking for clearer signals from policymakers and a more stable market environment.
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