What are leveraged ETF Tokens?

Introduction

For those confident about the next direction of a specific cryptocurrency, the Leveraged ETF products could be a handy solution. They replicate the token movement, but with a leveraged factor (3X or 5X), and also allow users to invest in favor or against it.

With Gate.io ETF Leveraged Tokens, users can be exposed to cryptocurrencies without liquidation risks, maintaining margin and collaterals. What they have to do is be aware of the market ups and downs. This product is recommended for short-term market movements.

What are Leveraged ETF Products?

An ETF is basically an investment fund traded on a broker or exchange that uses financial derivatives and debt to replicate the returns of an underlying asset or index. Gate.io’s Leveraged ETFs are ETFs that track a specific cryptocurrency movement on 3:1 (for 3X products) and 5:1 (for 5X products) ratios.

They are perpetual products managed by a fund, and can be held for as long as the investor wants to. Given the position adjustment mechanism, which will be further covered in this article, Leveraged ETFs are not recommended for the long term. Also, the fund managers rebalance the quotas on a daily basis, so the price never falls to zero.

Traditional ETFs vs. Crypto Leveraged ETFs

When ETFs (Exchange Traded Funds) surged in traditional finance, they revolutionized the market, reducing costs, and allowing greater portfolio diversification. The SPDR ETF (“Spider”) is one of the most famous globally and tracks the returns of the S&P 500 Index.

The ETFs available on Gate.io work similarly, but they refer to one single asset (as Bitcoin or Ethereum, for example). Also, since they are leveraged, their main objective is to potentialize the returns of the underlying token.

Take a simple example of a leveraged ETF of Bitcoin: if the price of Bitcoin increases +5% in one day and you have a 3X leveraged ETF of Bitcoin (named BTC3L), your asset would have appreciated around 15% in the same day. Remember that the logic works the same when the market prices go down, so this is, in fact, a risky asset.

Leveraged ETFs are perpetual products, which means they don’t have a settlement date, and you can hold them as long as you want based on your investment strategy.

Understanding leveraged ETFs’ tickers

When you go to the ETF Leveraged Tokens Page you’ll face several products being offered, the first step before investing is to understand what they represent. The leveraged ETF ticker is composed of three main parts:

1. The token
2. The multiplier (3x or 5x)
3. The direction (long or short)

Gate.io currently offers 3x and 5x multipliers of the most traded tokens globally, such as BTC, ETH, SHIB, AXS, DOT, XRP, LTC, and many others.

It also allows the investor to open “long” or “short” positions. A “long” position is when you believe the underlying asset will rise in value in the future, while a “short” position is when you believe the underlying asset will decrease.

Pro tip: Do you know the movie “The Big Short”? Long story short: the protagonists predicted the US housing market collapse in 2008-2009 and invested heavily against it — and profited hundreds of millions based on their correct analysis of the market. The movie is called “The Big Short” because they opened short positions on a large scale.

Using the examples above:

• The BTC3L represents an ETF that performs around 3X the performance of the Bitcoin in the same direction.
• Similarly, the BTC3S represents an ETF that performs 3X what BTC does but in the opposite direction.

What is the difference between leveraged ETF and perpetual trading?

While in perpetual trading, you need to add collateral and have the chance of being liquidated depending on the market, this doesn’t happen with Gate.io’s leveraged ETFs.

Also, in perpetual trading, the leverage varies with the fluctuation of the current position value, while on leveraged ETFs the position is adjusted on a daily basis.

What is the difference between leveraged ETF and margin trading?

In margin trading, the user has the same objective as the ETFs of amplifying the trading gains, but you still need to add margin loans as collateral to the total investment. Once again, Gate.io’s leveraged ETFs don’t require collateral or loans. Also, there isn’t the risk of liquidation on leveraged ETF products.

Pros of Leveraged ETFs

• Can’t be liquidated: when you invest in leveraged ETF tokens, you know what is the maximum value at risk. There isn’t the possibility of being liquidated, so this makes the investment analysis process easier;
• Doesn’t need collateral: you don’t have the risk of being margin called and losing the assets you would’ve put as guarantees.

Cons of Leveraged ETFs

• High risk: although they seem attractive and an easy way to earn profits, it’s important to reinforce that when the asset goes in a different direction you expected, your losses are also multiplied
• Fees to pay: although users do not need to pledge collateral, it’s worth mentioning that a daily management fee of 0.1% is charged.

Whom are the leveraged ETFs recommended to?

Leveraged tokens are indicated to expert investors already used to crypto market volatility and might use it for hedge or short-term investments.

Also, this product is not recommended for medium to long-term investments due to the daily position adjustment mechanism. The ETF has a specific price and the investor buys an amount of “shares” (or “quotas”) at this particular price. If there is profit on a day, the positions will still be opened, requiring no adjustments. If there is a loss, the positions are rebalanced and reduced, representing the multiplier effect of the ETF loss.

In lateralized markets (with successive ups and downs), due to the position adjustment mechanism and friction costs, it’s unlikely that an investor would profit from this strategy. But if you’re confident that a specific token will move unilaterally in a short period, it is worth adding this product to your portfolio!

Conclusion

If you believe a certain token will experience a short-term movement in prices - going up or down - you should check out Gate.io ETF Leveraged Tokens. These products offer potential returns if your price predictions are correct, and don’t incur in liquidation risks given the daily rebalancing made by the ETF fund managers. This means that, in the worst case scenario, you won’t lose more than what you invested, which doesn’t happen when you open leveraged positions in Margin Trading or Futures Trading.

And keep in mind that along with the potential returns, there are also potential risks - if the market goes in a different direction, your losses will also be multiplied.

Gate.io Leveraged ETF Products are great for when there are strong indicators that a token will follow a specific direction, and if done properly, can considerably increase your returns.