Lecture 4: Leveraged Crypto ETFs - Rebalancing

Leveraged Crypto ETFs are generally rebalanced every day at 0000 hours (UTC+8)  to ensure the leverage ratio remains at the stated number. When there is a sharp fluctuation and the underlying asset’s fluctuations exceed a given threshold figure (3x for both long and short) MEXC will rebalance the fund in order to bring its leverage in line with the 3x ratio again. This rebalancing only applies to the party that has made a loss. For example, if the price of BTC rises by 15%, the BTC3S product will be rebalanced but BTC3L will remain unchanged. Do note that if the market trend reverses after the fund is rebalanced, the price of the ETF may rebound more weakly prior to the rebalance, relative to the price of the underlying asset.

Return Rate Dynamism

Using BTC3L (BTC 3x Long) as an example:

If the daily trend of the BTC in the spot market over a period of four days is +10%, +10%, +10%, +10% respectively, the return rate of BTC3L will be 185%. This is more than 3 times the return of owning BTC in the spot market (44%).

If it is -10%, -10%, -10%, -10% respectively, the return rate will be -76%, which would be more than twice the losses you would have incurred if you had owned BTC in the spot market (-34%);

If it is +10%, -10%, +10%, -10%, the return rate of BTC3L in four days will be -17%, which would underperform your returns of 2%, if you had owned BTC directly in the spot market.

In simple terms, holding a position in a leveraged crypto ETF in times when the market is clearly trending upwards or downwards means that traders can expect their returns or losses to exceed that of another trader who is holding a crypto position in the spot market. However, in times of great market volatility, the leveraged crypto ETF product may underperform its underlying asset.

Disclaimer:

Crypto Leveraged ETFs are an emerging financial product. The content above does not constitute investment advice. Please be aware that all investments carry risk. Trading leveraged ETFs may seem simple but inexperienced/amateur traders should be wary as cryptocurrencies can be highly volatile.

Crypto Leveraged ETFs may reduce the risk of liquidation, but in extreme conditions their price may approach zero and they may be liquidated. Please pay attention to the difference between order price and net value to avoid losses.