Bitcoin is still the Investment Exposure of Institutional Investors. Can Leveraged ETF increase the yield in unilateral markets?
The product logic of leveraged ETF originates from the traditional financial market. It is a perpetual leveraged product that amplifies the rise and fall of the spot according to a specific multiple. For example, when BTC spot rises by 1%, BTC5L will rise by 5%, and BTC4L will increase by 4%; vice versa.
Taking the MEXC’s BTC3L/3S as an example, this transactional product will track the rise of Bitcoin and achieve a certain multiple of Bitcoin profits every day (such as 2 times, 3 times or — 1 time, — 2 times). So, assuming that a user, Alice wants to get more profits in the trending market, she can choose BTC3L-MEXC cryptocurrency leveraged product, which is named as “asset symbol+ 3L” (triple long product) and asset code + 3S (triple short product).
As long as the price of Bitcoin rises by 1%, the net value of the corresponding BTC3L product will rise by 3%. But what if the current market is a bear market? To put it simply, Alice can earn more by short sell Bitcoin. At this time, he can choose BTC3S. As long as the Bitcoin price falls by 1%, the corresponding net product value will rise by 3%.
You will find that the Bitcoin leveraged ETF provided by MEXC can obtain more returns without deposits and borrowing. Alice can trade directly after looking at the price and net value. The operation is as easy as Bitcoin spot trading.
But the question is, what happens if Alice is unable to predict the Bitcoin price and market trend? For example, if Alice spent 10,000 USDT on MEXC to buy BTC3L, but the original rising unilateral market suddenly deteriorates, and the Bitcoin price fell by 10% for a short time, then Alice’s 10,000 USDT would become 7,000 USDT (because the loss would also become three times: 10,000 USDT* 10% * 3). What if Bitcoin keeps on falling? MEXC introduced a rebalancing mechanism to control risks and ensure that investors will not close their positions.
Under the rebalancing mechanism, as the price of the underlying asset (such as Bitcoin) changes, the position at the beginning of each cycle must be adjusted to ensure that the rate of return of the underlying asset corresponding to the rate of return anchors to a certain multiple (such as 3 times). Regular rebalancing position adjustment mainly adjusts the position appropriately according to the opening net value of each cycle, so that the risk exposure of this cycle can be anchored to the multiple of the corresponding underlying asset risk exposure, that is, if the initial net value of the current period is S (tk), the exposure set at the beginning of the period is the return times × Equivalent USDT position of S (tk).
Under the non-periodic rebalancing mechanism, when the market fluctuates violently, MEXC will rebalance its position as long as the fluctuation range of the spot price of the underlying asset (such as Bitcoin) exceeds the given threshold (15%) compared with the previous rebalancing point. At this time:
l If the market trend continues after triggering non-periodic rebalancing, the user’s loss will become less, which can effectively avoid calling.
l If the market trend starts to rebound after triggering the non-periodic rebalancing, although the user’s income may be reduced due to the position reduction caused by the rebalancing intervention. In this case, this situation will not affect the user’s overall income.
In short, even if the market was hit with a huge instantaneous reverse, MEXC’s leveraged ETF investors do not need to worry about the risk of forced liquidation. As long as they recognize the development direction of the investment target (such as Bitcoin), the income is controllable.
From this point of view, if you wish to use leveraged ETF when investing in cryptocurrency, it is important to look at the market trend. Generally speaking, leveraged ETF investors need to correctly judge the market price trend before reducing their risk exposure and then pay attention to the market fluctuation direction (i.e., whether it is a unilateral market). Now, let us take a look at Bitcoin’s trend in the past 30 days. As shown in the figure below, it rebounded at the bottom of $29,299 USD. Therefore, MEXC leveraged ETF seems to be a good choice if you want to seize this rebound and maximize revenue.
It is worth mentioning that MEXC has also introduced the compound interest mode into the leveraged ETF products; that the position income will be automatically transferred to the principal. Suppose the leveraged ETFs purchased by the user produce floating profit (the floating profit before without rebalancing). In this case, the floating profit will increase the position of the leveraged ETFs at the next rebalancing, that is, adding a position three times the floating profit. In a unilateral market, this model will further increase the income of investors.
What are the risks of leveraged ETFs?
Although MEXC’s leveraged ETF products are very mature in terms of risk of return, they may still incur a certain capital wear cost in case of small market fluctuation or the volatile market. In addition, although the leveraged ETF greatly reduces the risk of liquidation, in other extreme or bilateral volatile markets, such as continuous sharp rise and continuous sharp fall, the net product value may tend to return to zero and the liquidation risks may also occur.
Therefore, as an innovative financial derivative, regardless of the advantages of leveraged ETF, the fluctuation risk of the cryptocurrency market exists naturally, so investors still need to pay close attention.
Recently, Musk praised BTC again, and the AKR managed by Cathie Wood withdrew from the medium concept stocks and continued to increase the position of 140,157 for Grayscale’s GBTC. Thus, the market seems to indicate that BTC is still the investment exposure targeted by institutions. Under this market background, leveraged ETF is also a good choice for those who prefer low-risk derivatives.
Note: This article is for information sharing only and does not constitute any investment advice.