Knowledge

Introduction of Leveraged ETF Token

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I. What is a Leveraged ETF Token?

An ETF (Exchange Traded Fund) is a group of securities that you can buy or sell through a brokerage firm on an exchange. ETFs can offer a wide range of asset classes – from traditional listed company investments to other asset flows such as currencies or commodities. Furthermore, ETF structures allow investors to access short-term markets, gain leverage, and avoid short-term capital gains taxes in some jurisdictions.

Leveraged ETF Token is a margin product based on the underlying digital asset. Through leveraged ETF Tokens, the gains and losses can be magnified. E.g.  For every 1% increase in BTC price, “BTC BTC3L” – a 3x long BTC token will gain 3%. For every 1% drop in BTC Price, “BTC BTC3S” – a 3x short BTC token will decline by 3%.

Due to market volatility, the latest transacted price may deviate from the net value of the underlying asset. As such, we also publish both the net unit value of the underlying asset and the latest transacted price concurrently to avoid losses for investors.

II. How does Leveraged ETF Tokens Work?

The leveraged ETF token tracks the price action of the underlying tokens. The modus operandi of leveraged ETF products is based on daily adjustment of trading book positions at fixed time intervals or when the leverage is greater than the threshold limits of 4x.

Similar to futures contract products, leveraged ETF token products are derivatives with leveraging effects. Investors’ gains and losses can be amplified through the effect of leveraging. The calculation of the net equity value and adjustment of trading book position will take place daily at UTC 00:00.

In order to avoid liquidation, intra-day position adjustment will take effect if the trading book position exceeds the leverage limits by 4X. It is important to note that the calculation of the position adjusting method above does not take into consideration the difference in underlying asset prices, fees, and rounding errors that may occur when the position adjusting is triggered and order executed.

III. Advantages of Leveraged ETF Tokens

Comparing Leverage ETF Token to 3X leveraged futures contracts:

  • If a user buy 1 leveraged ETF token and 3X leveraged futures /contracts and the underlying asset price increased by 10%, the floating profit for leveraged ETF token will be 0.3, 0.69, 1.197, and the floating profit for 3X leveraged futures contracts will be  0.3, 0.63, 0.993 respectively before fees.
  • Leveraged ETF Token has a better rate of returns than leveraged futures products during trending market conditions. However, during volatile market conditions, leveraged futures products will yield better returns.

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