Crypto Bulls: About to go LMBO, or About to Get REKT?
Editor's note: Any and all references to time frames longer than one trading day are for purposes of market context only, and not recommendations of any holding time frame. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don't have the resources, time or inclination to constantly monitor and manage your positions, leveraged and inverse ETFs are not for you.
If you want safety, you may choose to own short-term U.S. Treasuries; if you're open to risk, you may be looking to enter the crypto space. The cryptocurrency industry is famously volatile* and there’s little to suggest that the wild swings will calm down anytime soon.
With the U.S. presidential election fast approaching, we could see even greater volatility as traders assess the candidates’ odds of victory and how who sits in the White House may impact crypto. Add in the fact that we’re entering a notoriously rocky season of the year for risk assets in general, and you have an intriguing setup for crypto and its related equities.
The crypto ecosystem is broader than just currencies like Bitcoin and Ethereum. Traders can get exposure through the stocks of companies engaged in distributed ledger or decentralized payment technologies, covering sectors like blockchain, non-fungible token (NFTs), decentralized finance (DeFi), and digital asset mining equipment.
Traders can track the performance of this cutting-edge sector with benchmarks like the Solactive Distributed Ledger & Decentralized Payment Tech Index.* It contains U.S.-listed stocks that have business operations in the field of distributed ledger or decentralized payment technology.
Below is a daily chart of the Solactive Distributed Ledger & Decentralized Payment Tech Index, as of September 27.
Source: Solactive, September 27, 2024.
The performance data quoted represents past performance. Past performance does not guarantee future results.
Bullish Catalysts for Crypto
Here are some potential bullish catalysts that could drive the crypto sector higher in the weeks and months to come:
- Embraced by Republicans and Democrats: Both Donald Trump and Kamala Harris have signaled support for the U.S. crypto industry, which could entail, among other things, less regulation or the government creating a strategic Bitcoin reserve (oh, the irony). The crypto industry is spending massive amounts to influence government policy. Crypto Super PACs have donated around $119 million this election cycle, according to NPR.com. Money talks in politics and traders may start to price in crypto-friendly policies from the new administration.
- Don’t Forget AI: High-end chips manufactured by the likes of Advanced Micro Devices, Inc. (NASDAQ: AMD) and Nvidia Corporation (NASDAQ: NVDA) are at the heart of cryptocurrency mining. And they’re also essential to the artificial intelligence (AI) boom (CoinDesk). So long as the AI mania continues, that should help those companies’ stocks.
- Stocks are Hanging in There: Bitcoin is essentially a high-beta risk asset, and many stocks connected to the crypto space are as well. So, if equity markets can push higher despite the scary fall seasonals, it will be welcome news to crypto bulls.
Bearish Catalysts for Crypto
There are also plenty of reasons to be wary of crypto right now. Consider the following:
- Bitcoin Could Tumble: It’s disconcerting for Bitcoin bulls that the king of crypto coins hasn’t been able to stage a meaningful rally this summer, especially with the approval of spot Bitcoin ETFs earlier in the year. Maybe losing the 50-day* in late August is a prelude to a much sharper decline.
- Risk Assets Could Take a Dive: The September to October window can be fraught with danger for equities and other risk assets—and with the election two months away we could easily see heightened volatility. This would almost certainly hit crypto. Interestingly, according to an analysis by Bitfinex, in the last three election cycles, Bitcoin fell in the three months before the vote and then rallied afterwards.
- The AI Boom Could be Over: Investors didn’t react favorably to Nvidia’s latest earnings, suggesting that all the good news may be baked into the stock. Nvidia has been closely correlated with Bitcoin so if the stock is a bursting bubble, that spells trouble for crypto.
Crypto Bull or Bear, Which One Are You?
Direxion recently introduced two innovative ETFs that allow traders to bet on short-term swings in stocks with a crypto component. Remember, these ETFs provide exposure to equities, not actual cryptocurrencies like Bitcoin.
The Direxion Daily Crypto Industry Bull 2X Shares (Ticker: LMBO) seeks daily investment results, before fees and expenses, of 200% of the performance of the Solactive Distributed Ledger & Decentralized Payment Tech Index. Bears, meanwhile, can express their pessimism with the Direxion Daily Crypto Industry Bear 1X Shares (Ticker: REKT). This is an inverse ETF that seeks daily investment results, before fees and expenses, of 100% of the inverse (or opposite) of the performance of the Solactive Distributed Ledger & Decentralized Payment Tech Index.
*Definitions and Index Descriptions
An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.
Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.
The Solactive Distributed Ledger & Decentralized Payment Tech Index (SOLDLDPT) seeks to track the performance of US-listed securities that have business operations in the field of distributed ledger or decentralized payment technology, which includes the following business fields: blockchain technology, non-fungible tokens, decentralized finance, and digital asset mining hardware.
One cannot invest directly in an index.
Solactive AG is not a sponsor of, or in any way affiliated with, the Direxion Daily Crypto Industry Bull 2X Shares or Direxion Daily Crypto Industry Bear 1X Shares.
Direxion Shares Risks – An investment in a Fund involves risk, including the possible loss of principal. A Fund is non-diversified and includes risks associated with the Fund’s concentrating its investments in a particular industry, sector, or geography which can increase volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause prices to fluctuate over time.
Leverage Risk – The Bull Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in market conditions that are adverse to its investment objective than a fund that does not utilize leverage. A total loss may occur in a single day. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index and may increase the volatility of the Fund.
Daily Index Correlation Risk – A number of factors may affect the Bull Fund’s ability to achieve a high degree of correlation with the Index and therefore achieve its daily leveraged investment objective. The Bull Fund’s exposure to the Index is impacted by the Index’s movement. Because of this, it is unlikely that the Bull Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Bull Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day.
Daily Inverse Index Correlation Risk – A number of factors may affect the Bear Fund’s ability to achieve a high degree of inverse correlation with the Index and therefore achieve its daily inverse leveraged investment objective. The Bear Fund’s exposure to the Index is impacted by the Index’s movement. Because of this, it is unlikely that the Bear Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Bear Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day.
Crypto Industry Investing Risk — Companies in the crypto industry are subject to various risks, including the inability to develop digital asset applications or to capitalize on those applications, theft, loss, or destruction of cryptographic keys, the possibility that digital asset technologies may never be fully implemented, cybersecurity risk, conflicting intellectual property claims, and inconsistent and changing regulations.
Information Technology Sector Risk — The value of stocks of information technology companies and companies that rely heavily on technology is particularly vulnerable to rapid changes in technology product cycles, rapid product obsolescence, government regulation, and competition, both domestically and internationally, including competition from competitors with lower production costs.
Financials Sector Risk — Performance of companies in the financials sector may be materially impacted by many factors, including but not limited to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets.
Additional risks of each Fund include Effects of Compounding and Market Volatility Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Other Investment Companies (including ETFs Risk), Cash Transaction Risk, Passive Investment and Index Performance Risk and for the Direxion Daily Crypto Industry Bear 1X Shares, Shorting or Inverse Risk. Please see the summary and full prospectuses for a more