Gate.io Blog Leveraged Tokens - Bull Bear Mechanics Explained

Leveraged Tokens - Bull Bear Mechanics Explained

02 April 10:39

Leveraged tokens are traded with the spot trading methods, long or short positions can be obtained simply by purchasing the corresponding ETF tokens. Theoretically, these tokens have a greater-than-usual degree of liquidity due to them being traded in the perpetual futures markets. In this article, we will give examples for you to easily understand how the math works for leveraged token.

Let me take BTC3L as an example, which is the 3x long BTC token. For every 1% BTC goes up in a day, BTC3L goes up 3% and for every 1% BTC goes down, BTC3L goes down 3%.

For BTC, the corresponding Leveraged tokens give you a 3x exposure or leverage. If you buy BTC3L, basically meaning that you are taking a 3x long on BTC. The condition is similar for other coins and their corresponding leveraged tokens. If you buy a bear token, you are basically taking a 3x Short.

But there’s a catch. There is a rebalancing which goes on daily at 00:00:00 UTC+8. That means that each leveraged token trades on Gate.io in order to once again reach its desired leverage.

You may not be liquidated due to the rebalancing mechanism, but you could also lose almost like 99% of the value if the underlying asset changes by over 33% in one day.

At one extreme, for instance,
1. You buy BTC3L: If Price of BTC Goes up by 33%, Price of the BTC3L will go up by approximately 99%. But if the price of BTC falls by 33%, the Price of BTC3L will also go down by 99%.

2. Similarly for BTC3S, if the price goes up by 33%, you will lose 99% of the value. And if the price of BTC goes down by 33%, BTC3S will go up by 99%.

Do the Math, now if Price of BTC goes up by 50% in a day, the price of BTC3L will go up by over 150%. And the BTC3S will lose more than 99.9% of the value.

The fluctuations are calculated based on the NAV. The below chart is for intraday price fluctuation rate of leveraged ETF products.

Large price fluctuations and high risks are characteristics of ETF products. It would be a waste to see traders being burned by leverage tokens because they don’t understand how they work. Please understand the mechanics before making your investment.

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Leveraged Tokens - Bull Bear Mechanics Explained

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