For most of the history of cryptoassets, the risk of volatility spilling over into traditional financial markets was limited. Though seismic for crypto investors, even 2021’s crypto winter was a non-event from the perspective of the TradFi world. But as the cryptoasset market becomes increasingly protected by legislation, it is also becoming more closely connected to traditional markets.
In 2025, digital asset treasury companies became the hottest way for investors to access exposure to cryptoassets, and for companies to profit from the exuberance surrounding an asset class enjoying unprecedented support from the Donald Trump administration. But despite the excitement, the size of crypto exchange-traded funds – legalised in 2024 – grew to surpass digital asset treasury companies by market capitalisation over the course of a year. At the time of writing, these values stand at $151bn and $141bn, respectively.
ETFs are wrappers that package economic exposures – like crypto price movements – into exchange-tradable securities that allow investors to access exposure without directly owning the asset. Some offer leveraged exposure, typically promising a multiple of the daily return of the underlying asset.
The leveraged crypto ETF market remains a mere fraction of the broader ecosystem, with a market capitalisation of $4.6bn. However, it is growing rapidly. As it grows, so too does its footprint in short-term funding markets, principally the repurchase agreement market.
Leveraged crypto ETFs are natural users of the repo market because they achieve target exposures through futures, which create oscillations between excess liquidity and funding needs that vary with the price volatility of cryptoassets. The intrusion of crypto price volatility into the most important funding market in finance carries potentially pernicious implications for financial stability.
The repo market
The repo market functions as the circulatory system of financial markets. Repos work through the sale assets combined with agreements to buy them back at a later date, typically the next day, Â week or month.
Repos are one of the main sources of leverage in financial markets. They underlie the treasury basis trade, which allows hedge funds to arbitrage small differences in price between economically similar exposures. As tools of short-term financing, repos allow dealers and market-makers to hold the inventories necessary to maintain liquidity in financial markets. Central banks also rely on repo facilities to backstop monetary policy implementation and their ‘lender of last resort’ function uses repos as its mechanism. When the repo market breaks down, like a clot in a critical artery, vital oxygenic flows are disrupted. Price discovery falters, default probabilities spike and stress spreads to the rest of the system.
Repo markets are huge, with average daily exposures of $12.6trn – a little over 10% of global gross domestic product in 2025. The usage of the repo market by leveraged crypto ETF providers is still small, both as borrowers and lenders in the market.
In the three months leading up to June 2025, Volatility Shares – a leveraged crypto ETF provider – executed $13bn in repo transactions. Although this level of participation made it the largest borrower among US mutual funds and ETFs over this period, it is nonetheless a relatively trivial flow. While transaction volumes at this level should not be cause for concern over financial stability, the mechanism through which crypto ETFs have recourse to the repo market, combined with their rapid growth could be.
How crypto volatility spills into the repo market
Leveraged crypto ETFs generally do not hold crypto directly. For instance, Volatility Shares’ 2x leveraged bitcoin ETF held no bitcoin as of its Q3 disclosures. Instead, they provide leveraged exposure to bitcoin through cash settled futures contracts traded through a clearinghouse.
ETF providers maintain liquidity in the form of cash and high-quality liquid assets to meet initial and variation margin requirements that stem from fluctuations in the value of their futures contracts. These are collateral requirements that minimise their risk of default as a counterparty to the clearinghouse. Providers also need cash to meet redemption requests from the ETF holders as well as to manage their daily rebalancing needs.
Rebalancing futures exposures is essential to provide exposure to the daily multiple of movement. When bitcoin goes up, Volatility Shares must add exposure for the next day to maintain their 2x multiple target, which they can fund by borrowing cash in the repo markets or reducing their lending in repo markets. When prices fall, exposure must be reduced.
Problems may arise if the leveraged crypto ETF market were to grow dramatically, and volatility in crypto prices coincided with other sources of pressure on funding markets. In a world where leveraged crypto ETFs are meaningful players in repo markets, a large one-day drop in crypto prices produces a substantial synchronised source of funding demand, or contraction in funding supply, in repo markets. All providers will need to meet variation margin from clearinghouses simultaneously.
If such an event coincided with a dash for liquidity in markets, such as in the acute spike in repo rates in March 2020, then volatility in crypto markets would feed through into the funding market through the medium of leveraged crypto ETF providers needing to meet their margin calls. Critically, the rise of leveraged crypto ETF providers creates state contingent demand for immediate cash, where the contingent state is the price of cryptoassets.
Current levels of demand from leveraged crypto ETF should not give rise to concern. As structural users of the repo market, their growth presents a novel form of transmission of crypto price volatility into conventional financial markets. Prudential regulators may have the privilege of ignoring them for now, but that privilege may not last forever.
Lewis McLellan is Head of Content of the Digital Monetary Institute and Conor Perry is an Economist at OMFIF.
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