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    Gate.io Blog Gate.io Observation: Use Leveraged ETFs to Earn More, With Less!

    Gate.io Observation: Use Leveraged ETFs to Earn More, With Less!

    16 August 17:12



    A Leveraged ETF is a traditional financial derivative, which refers to the exchange open-end financial fund (Exchange Traded Fund),the purpose of it is to track the rise and fall of a given target asset, and the rise and fall is approximately a specified multiple of the target asset market. Compared with traditional leveraged trading, the difference with leveraged ETFs are that users do not need to pay margin. Each leveraged ETF product corresponds to a contract position, which is managed by the platform fund manager.

    Gate.io leveraged ETF is a crypto coin trading derivative launched by Gate.io, Corresponding to the current currency on the market, it is essentially a perpetual contract.


    Basically continuing the trading characteristics of traditional leveraged ETFs, with its own leverage properties, so there is no margin and liquidation. Its automatic position adjustment mechanism is an innovation of leveraged ETF products, and how to make a good use of position adjustment is also the key to allowing capital to expand with limited resources.


    The principle behind leveraged ETFs: adjustment mechanism


    The product feature of leveraged ETFs is to track daily returns and not involve a margin mechanism, so that users do not have to bear the risk of possible liquidation. This involves the important mechanism behind-the adjustment mechanism. The key to the ability of leveraged ETFs to track the multiple returns of the underlying assets lies in the positions of the managers behind the ETF. Correspondingly, leveraged ETFs in cryptocurrencies are the positions of the issuance platform. Leveraged ETFs are always a fund (Fund), so ETFs, like other funds, involve net worth when trading.


    Net value refers to the current market value of the investment portfolio share corresponding to each unit of ETF, the net value is the current fair value of the underlying currency share, The actual trading price of leveraged ETF products in the secondary market is anchored to the net value of the currency. For example, when the net value of BTC3L is $1, the transaction price in the secondary market may be $1.1, or $0.9.Therefore, the managers behind the fund will go through rigorous mathematical calculations to exactly achieve the effect of 3 times long or 3 times short the net value. By dynamically adjusting positions, leveraged ETF products can maintain a fixed leverage multiple consistently despite changes in price. What is presented to us is to automatically increase the position when it is profitable, and automatically reduce the position when it loses, so as to avoid the risk of liquidation.


    Advantages of the position adjustment mechanism: automatic compound interest and stop loss in batch


    Gate.io provides leveraged ETF products of multiple mainstream currencies, which are expressed in currency, multiple and long-short direction; For example, BTC3L is a 3 times bullish token for Bitcoin, and L is the 1637739283488623eviation of long; BTC3S is a 3 times bearish token of Ethereum, and S is the 1637739283488623eviation of Short. For long leveraged ETFs, when the market price rises, the value of the underlying assets would increase, Leveraged tokens become an automatic compound interest system, adding the leverage to the increased net worth to earn more. When the market declines, the value of the underlying assets will decrease, and leveraged tokens will become a batch stop-loss system, which removes the leverage that reduces the net value and loses less.


    Since the position adjustment mechanism of leveraged ETFs are automatically adjusted daily, it has advantages for both continuously rising and falling markets. However, the volatile or chopping market will cause the wear and tear of funds, and long-term holding of the ETF could be a great risk to investors.
    You can use the net value: $1×{1+ the rise and fall of the underlying currency × target leverage ratio} data, specifically:

    -Unilateral market: keep going up and up again



    On the first day, BTC rose from $200 to $210, an increase of 5%. The net value of BTC3L becomes: $200(1+5%×3)=$230.


    On the second day, BTC rose from $210 to $220, an increase of 4.76%. The net value of BTC3L becomes: $230× (1+4.76%× 3)=$262.84.


    The rise and fall of leveraged ETF products in two days is: ($262.84-$200)/ $200*100%=31.4% >30%


    It could be seen that the performance of leveraged ETF products is better than that of ordinary open 3 times leverage to buy BTC perpetual contracts.
    -Unilateral market: falling again and again



    On the first day, BTC fell 5%, and the net value of BTC3L became: $200 (1-5%×3)=$170


    The next day continues to fall, with a fall of -5.26%, and the net value of BTC3L becomes: $170 (1-5.26%×3)=$143.17


    The total rise and fall of leveraged ETFs in two days is: ($143.17-$200)/ $200*100%= -28.4%> -30%


    It could be seen that in the continuous decline of the market, the loss of leveraged ETFs will be smaller than that of futures contracts.
    Disadvantages of the position adjustment mechanism: market fluctuations, capital wear and tear


    The advantage of the position adjustment mechanism is obvious, and the disadvantage is that in a choppy volatile market, every rebalance will cause investors to lose funds. For example, under the extreme repeated fluctuations of 1000 points, but the currency price remains unchanged after the rise and fall, there would be no loss in the spot, and also no loss in the futures contract without liquidation, while the leveraged ETF will have a large loss


    Similarly, we use the net worth data to see:


    Bilateral shocks: up and down



    On the first day, BTC rose from $200 to $210, a 5% increase. The net value of BTC3L becomes: $200(1+5%× 3)=$230


    On the second day, BTC fell from $210 back to $200, a decrease -4.76%, and the net value of BTC3L became: $230(1-4.76%× 3)=$197.16


    The rise and fall of leveraged ETF products in two days is: ($197.16-$200)/ $200*100%=-1.42%<0%


    It could be seen that if BTC rises and falls back to its original price, leveraged ETF products will not have an advantage.


    Bilateral shocks: falling and rising



    On the first day, BTC fell 5%, and the net value of BTC3L became: $200 (1-5%×3)=$170


    The next day BTC rose from $190 back to $200, a rise of 5.26%. The net value of BTC3L becomes: $170 (1+5.26%× 3)=$196.83
    The rise and fall of leveraged ETF products in two days is: ($196.83- $200)/ $200*100%=-1.59%<0%


    It could be seen that same as the rise and fall, the leveraged ETF will not return to the original price and still does not have an advantage.


    Summary: The adjustment of leveraged ETF positions enables users to earn more when making money and lose less when losing money. However, although the position adjustment mechanism will not cause liquidation, it will cause capital wear and tear under volatile market conditions. In this case, will cause the possibility of user assets to become zero in long-term holding and cause great risks to investors. Therefore, leveraged ETFs are more suitable for investors who have accurate judgments about market trends, and are used for fund hedging or short-term holding in unilateral markets.



    Author: Gate.io Observer: Hannah.H


    *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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