What does the US SEC’s emergency halt of high-risk leveraged ETFs mean for the cryptocurrency market?

The U.S. Securities and Exchange Commission (SEC) has issued warning letters to multiple exchange-traded fund (ETF) providers, including Direxion, ProShares, and Tidal, explicitly halting applications for leveraged ETFs that attempt to offer more than 200% exposure to underlying assets.

This regulatory action directly targets the wave of ultra-high-leverage ETF applications that surged after the 2024 U.S. presidential election, which aimed to provide daily exposure of 3x to 5x for volatile assets such as Bitcoin and Ethereum.

01 Regulatory Crackdown: SEC’s Explicit Restrictions on Leveraged ETFs

On December 3, 2025, the SEC took decisive action by issuing warning letters to nine major ETF providers, effectively blocking new funds intended to offer daily three- to five-times exposure to stocks and cryptocurrencies.

Affected companies include well-known issuers such as Direxion, ProShares, Tidal Financial, and GraniteShares. This move marks a significant shift in the regulator’s stance towards extreme leverage in investment products.

According to Bloomberg, the SEC issued the warning letters on the same day they were drafted—an “unusually rapid move” that signals officials’ urgency to communicate their concerns about leveraged products to the investing public.

02 Regulatory Boundaries: The 18f-4 Leverage Cap

The core violation cited in the SEC’s warning letters is a breach of Rule 18f-4 under the Investment Company Act of 1940. This rule caps a fund’s risk exposure at 200% of its value at risk, using unleveraged assets as the benchmark.

The SEC clarified in its letter: “The fund’s designated reference portfolio provides an unleveraged benchmark for comparing to the fund’s leveraged portfolio to determine the fund’s leverage risk under this rule.”

Essentially, this regulation limits most ETFs’ leverage to no more than 2x the daily volatility of the underlying asset. Any leverage above this threshold requires special approval and stricter risk management procedures.

03 Aggressive Attempts: Halted 5x Leveraged ETF Proposals

Among the many applications, Volatility Shares submitted the most aggressive proposal, seeking approval to issue 5x leveraged ETFs linked to Bitcoin, Ethereum, Tesla, and Nvidia.

These products are designed to amplify a daily 10% move into a 50% gain or loss for investors, representing the highest leverage ever applied for in the U.S. ETF market.

The company filed 27 different ETF applications, including products tied to Solana, XRP, Coinbase, and MicroStrategy.

04 Market Context: Runaway Leverage in Crypto

The SEC’s action comes on the heels of the October crypto market crash, which triggered $20 billion in leveraged liquidations—the largest single-day liquidation event in crypto history.

“Leverage has clearly gotten out of control,” analysts at The Kobeissi Letter commented in response to the SEC’s warning letters. Glassnode data shows that the number of liquidations in the current market cycle is nearly triple that of previous cycles.

Currently, average daily liquidation values are $68 million for long positions and $45 million for shorts, far higher than the previous cycle’s $28 million and $15 million, respectively.

05 Difference Between Leveraged ETFs and Traditional Derivatives

Leveraged ETFs operate very differently from traditional leveraged derivatives. While they avoid common issues in crypto derivatives such as margin calls and automatic liquidations,

in bear or sideways markets, the requirement for daily rebalancing means losses can accumulate faster than gains, so leveraged ETFs can still result in significant investor losses.

06 Industry Impact and Outlook

With the SEC’s clear stance, ETF issuers must now either modify their strategies to comply with leverage limits or withdraw their applications entirely.

Some companies have already started adjusting their strategies. Earlier this year, Direxion launched the Direxion Titans leveraged and inverse ETFs, offering 2x and -2x exposure to hot sectors like tech and energy, with a quarterly rebalance mechanism.

Morningstar analyst Bryan Armour revealed that more than half of the leveraged ETFs launched in recent years have permanently ceased operations. This high failure rate highlights the challenges these products face in volatile market environments.

07 Takeaways for Crypto Investors

For ordinary crypto investors, the SEC’s action sends a clear message: the regulator is cautious about extreme leverage products and is increasingly focused on investor protection and market stability.

Though the current SEC leadership is generally supportive of crypto, officials appear unwilling to compromise on leverage limits that could threaten market stability.

On trading platforms like Gate, investors can focus on regulated spot Bitcoin ETF products. For example, as of December 2, 2025, the ProShares Bitcoin Strategy ETF (BITO) had a net asset value (NAV) of $13.47 and total net assets of $2.354 billion.

Investors should recognize that 2x leverage has become the practical upper limit for most ETF products; those expecting 5x leveraged crypto and single-stock funds to enter the U.S. market soon will need to adjust their expectations.

Future Outlook

With the SEC drawing a clear red line on leverage, the 27 aggressive ETF applications filed by Volatility Shares and others have been forced to pause. The frenzy for extreme leverage has been temporarily checked by the rational hand of regulation.

On the Gate platform, investors are shifting focus to spot ETFs and compliant derivatives. The ProShares Bitcoin ETF (BITO) now manages $2.354 billion in assets, with its price trend serving as a window into institutional capital flows.

The tightening regulatory framework may well be the “lesson in discipline” that the crypto market needs as it transitions from adolescence to maturity.