Textbook Lesson: This Leveraged ETF Plunged 73% Since Inception – A Warning For Crypto Investors? – Tidal Trust II Defiance Daily Target 2X Long RIOT ETF (ARCA:RIOX), Riot Platforms (NASDAQ:RIOT)

The Defiance Daily Target 2X Long RIOT ETF RIOX, launched to double the daily returns of Bitcoin mining company Riot Platforms Inc. RIOT, has lost its value by as much as 73% in the three months.

The fund only started trading on Jan. 2.

This sharp fall highlights the high risks involved with leveraged ETFs, especially those that deal with the highly volatile cryptocurrency market.

RIOX attempted to offer its investors double the percentage change in the stock price of crypto miner Riot Platforms.

The ETF has since suffered huge losses following a sudden drop in Riot’s stock price.

Also Read: Bitcoin Miners Ride The BTC Boom, But Costs Tell A Different Story: JPMorgan Analyst

What’s To Blame?

The ETF’s investment strategy, using a 2x daily leverage on Riot stock, is one of the key reasons for its sharp fall. Leverage increases not only daily gains but also daily losses equally.

Further, the daily reset of the leverage causes a situation of a so-called volatility drag. That’s when the average return on the longer term is radically different from a simple multiplier of the return on the underlying asset, particularly in times of high volatility.

Riot’s share price itself fell 30.4% over the same period. This underperformance had a direct effect on the RIOX ETF.

The cryptocurrency market, to which Riot Platforms is heavily linked, also showed volatility over this period. Although Bitcoin experienced a peak in January, at more than $106,000, it subsequently fell below $85,000 in February, troughing at less than $79,000 in early March, and currently stands at around $81,000.

This decline in Bitcoin’s price most likely contributed to the poor performance of Bitcoin mining stocks such as Riot.

Company News Adds To Uncertainty

A number of firm-specific events concerning Riot could have had a role to play in the fall of its share price.

These include news about Bitcoin production updates, which indicated a minor decline in February because of maintenance and weather, and a non-binding deal to possibly acquire Rhodium Encore assets.

Moreover, a reported reduction in price target by JPMorgan in mid-March 2025 might have subdued investor sentiment.

Risks Of Leveraged ETFs

Leveraged ETFs like RIOX are inherently riskier than traditional ETFs. They are generally designed for short-term trading by sophisticated investors who understand the implications of daily leverage and are prepared for potentially significant losses. Defiance ETFs explicitly warns that if Riot Platforms Inc.’s share price decreases by more than 50% on a single trading day, RIOX investors could lose their entire investment.

The sudden and significant drop of the RIOX ETF is a harsh reminder of the dangers involved with leveraged ETFs, particularly those highly concentrated in volatile segments.

Investors consider such products only after extensive research and are aware of the possibility of large losses through market movements and daily leverage compounding.

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