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Home Blog Gate.io Observation: Leveraging new earnings. Where is the innovation of leveraged ETF?

17:16

30 July

Gate.io Observation: Leveraging new earnings. Where is the innovation of leveraged ETF?

Author:Gate.io Observer Jacky.S



In the crypto digital currency market, most of the trading derivatives come from the traditional financial industry. Leveraged ETFs are similar to ETF products in traditional finance, it is to track the rise and fall of the underlying asset,the extent of rise and fall are about three times of that underlying asset. Unlike traditional leveraged trading, there is no need to pay any margin when trading leveraged ETF products by users. Simply buying and selling coins, you could achieve the purpose of leveraged trading.


What is a leveraged ETF?


Leveraged ETFs are trading derivatives launched by Gate.io. The difference compared with traditional tokens is that leveraged ETFs have leveraged properties. All leveraged ETF products have corresponding current currencies in the market, which essentially correspond to perpetual contracts.


In short, we could understand leveraged ETFs as spot transactions, compared with directly participating in perpetual contract transactions, leveraged ETFs strive to optimize capital management, lower users' actual leverage expenses and leverage risks. Gate.io provides leveraged ETF products of multiple mainstream currencies, expressed in currency, multiples and long-short direction. For example, BTC3L is a 3 times bullish token for Bitcoin, and L is the abbreviation of long; ETH3S is a 3 times bearish token of Ethereum, and S is the abbreviation of Short.


Product principle of leveraged ETF


Leveraged ETF products manage funds in accordance with strict rules,according to the user's trading needs in the spot market,leveraged trading hedging through the perpetual contract market


If BTC rose by 1% that day, the net value of BTC3L would increase by 3% and the net worth of BTC3S is reduced by 3%.If BTC drops by 1% that day, the net value of BTC3L will decrease by 3% and the net value of BTC3S will increase by 3%.


Three times leverage does not stand for that the price is three times of the underlying currency


The price of leveraged ETF products is related to ETF profits and losses fluctuated in market fluctuations,it is reflected in the rise and fall of net value, so pay attention to the display of product unit net value when trading is needed. For example: a user buys in BTC3L with a principal of $100, which can be understood as automatically opening a 3x long contract. If BTC drops by 1% on that day, BTC3L drops by 3%, and the user loses $3.


The salient features of leveraged ETFs


The advantages of leveraged ETFs are obvious. First of all, leveraged ETF products will not be liquidated, and daily follow-up profit and loss will be adjusted to the leverage ratio back to the target leverage multiple. When leveraged ETF products are profitable, they will automatically increase their positions after its adjustment, and when they lose money, they will automatically reduce their positions after its adjustment, so as to avoid the risk of being liquidated. Furthermore, the leveraged ETF will automatically transfer the profit of the position into the principal to increase the position to achieve the effect of compound interest. Conversely, when it encounters a loss, the leveraged ETF will also automatically reduce the position and stop the loss to wait for the next wave of market


Of course, leveraged ETFs also have some shortcomings. Leveraged ETF products are relatively innovative, new, and have their own leverage properties, which may involve certain risks.


Second, there is no need to pay margin for leveraged ETFs. All costs are already included in the 0.1% daily management fee, including contract market handling fees, funding rates, and loss of open market spreads, etc.


In the future, Gate.io will also launch products such as portfolio ETFs and low-leverage inverse ETFs,through unique technical optimization, greatly reduce costs, facilitate user transactions, and save more management fees.


Position adjustment mechanism


Take 100 US dollars to buy in BTC3L as an example, in order to maintain product leverage ratio at about 3 times, it is necessary to adjust positions regularly for every day, rebalance the underlying assets to 3 times leverage. If BTC drops by 5% the next day, BTC3L drops by 15%, and the net value is US$82.45. At this time, the underlying leverage is 3.35 times,if you rebalance the position by 3 times, it is equivalent to losing part of the funds. Even if BTC has risen back to its pre-decline level, the net value of BTC3L is 98.1, which comes out a certain loss compared to the original 100 USD.


Except for the daily regular adjustment of positions, temporary adjustments will also be triggered in the event that the daily fluctuation of leveraged ETF products exceeds the threshold of 20%


For example, if a user buys BTC3L for 100 USD, when a single day rises 20%, it will trigger a temporary adjustment, equivalent to automatically increasing the position of the profitable part.


And if it drops 20% in the opposite direction again, a temporary adjustment will be made, and the final net value will become 96 US dollars,So only if market fluctuates up and down, the adjustment mechanism will cause net wear and tear


In order to reduce the wear and tear of the net value of long-term positions and reduce trading risks,Gate.io adjusted the target leverage from 3 times to 2.3 times on October 30, 2020. Which is, after the leveraged ETF product rises in a single day, when the leverage multiple reaches 1.5 times the leverage,or after the ETF product drops in a single day, the temporary position adjustment will be triggered only when the leverage multiple reaches 3 times the leverage,re-adjust the leverage to 2.3 times,In addition, if the single-day fluctuation of the underlying currency is less than 1%, there will be no timing adjustments to avoid unnecessary wear and tear of net worth.


Daily management fee


Leveraged ETF products will charge a daily management fee of 0.1% to make up for overhead costs for contract market fees and funding rates, long-term holding will lead to capital wear and tear, which is extremely risky. Therefore, leveraged ETF products are extremely suitable for short-term unilateral market investment, as if the buying direction is correct, you can use the adjustment mechanism to obtain higher compound interest returns. Even if the buying direction of leveraged ETF is wrong for a short time, leveraged ETF products will automatically stop loss and will not trigger a liquidation. This also means that only if part of the principal is still there, there is still a chance to achieve profit.


Application scope


Leveraged ETFs are suitable for professional investors, used for risk hedging, or short-term unilateral market investment, It is not suitable for medium and long-term investment, because of the existence of the adjustment mechanism, the longer the time, the greater the fluctuation and the more wearable funds come out. Leveraged ETF products have certain risks, and users should have an in-depth understanding of this before trading.


Summary


Gate.io leveraged ETF as an innovative product in the crypto digital asset market, while providing users with a wealth of investment portfolio strategies.Product details are even more meticulously crafted to meet the increasing transaction needs of users. Gate.io has always been adhering to a business style dedicated to solving various difficulties and pain points of users,It will continue to provide strong development momentum for many trading products including leveraged ETF products.


Let's experience leveraged ETFs now!


Author: Gate.io Observer: Jacky.S


*This article only represents the views of observers and does not constitute any investment advice.


*The content of this article is original and the copyright belongs to Gate.io. If you need to reprint, please indicate the author and source, otherwise legal responsibility will be pursued.


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