Fed Is About To Raise Rates? Leveraged ETFs May Be The Best Choice When The Market is in Bubble
The U.K. Financial Times reported on January 24 that the U.S. Federal Reserve (Fed) will confirm its plan to raise interest rate in March, while working on a tighter monetary policy and will hold its first policy meeting in 2022 this week.
Discussions on rate hike have been ongoing since last December. Due to the ambiguity of its implementation, the global stock market and cryptocurrency market have been plunging for days.
According to CoinGecko data, BTC fell by 30.8% in 30 days and is now at 35297u. To prevent the market bubble, are there any other more suitable products for us the investors to stay profitable?
1. Understanding leveraged ETFs
The answer is of course: yes. Here I will introduce a trading product with 3 years of innovative experience in the cryptocurrency space: leveraged ETF.
Leveraged ETF is a type of perpetual leveraged product that magnifies the price changes of the spot product, and aims to provide leverage gains of the benchmarked perpetual futures.
The name of the leveraged ETF is represented by “cryptocurrency + leverage + long/short direction”. For example, BTC3L/3S means a 3x long/short Bitcoin. If BTC price goes up/down by 1% on that day, BTC3L will go up/down by 3% and BTC3S will go down/up by 3%.
In other words, under different market conditions, leveraged ETFs can be used to achieve multiplied profits by longing, and achieve equal profits by shorting.
As illustrated in the figure above, BTC fell from a high point of 28890u-68999u to the current price of 35335u with repeated fluctuations on the daily graph. Therefore, it is suitable to buy BTC3L at a low price (the red-marked part) to achieve 3x profit. At the same time, buying BTC3S at a high price (the green-marked part) will also result in 3x profit.
In general, no matter whether the market is going up or down, I personally prefer to choose BTC3L to long in a unilateral uptrend, which is out of my personal belief and confidence in the cryptocurrency industry.
2. Diversity of trading tokens in leveraged ETFs
Currently, the cryptocurrency market offers mainstream ETF products in both long and short directions, including MEXC’s leveraged ETF and leveraged tokens by FTX and Binance.
Different trading platforms have a different listing mechanism and listing speed, therefore offering different varieties and categories of leveraged ETF products.
According to the latest statistics, MEXC’s leveraged ETF offers 166 tokens and 188 trading pairs, making it the trading platform with the highest number of leveraged ETF trading categories in the entire network.
We know that more options are available when there are more trading categories, and this leads to a greater chance of making a profit. Due to the advantages in listing speed and trading categories, MEXC will rapidly launch the popular projects, and then quickly launch the relevant leveraged ETF trading pairs according to their spot performance.
When mainstream tokens, such as BTC, going sideways and declining, listed projects like LOOKS can give us more choices.
The way we gain profit is as follows: We bought spot LOOKS at 1.67u on January 10. When the price reaches a high of 7.09u, we will achieve a profit of 324%.
Leveraged ETF is a good choice when we want to gain more profit, yet do not want to take a higher risk like Futures.
On January 15, LOOKS3L reached a low point. If you bought it at 0.759u at this time, regardless of compound interest and rate erosion, ideally, when it reached the highest point of 5u, you could achieve a profit of 558.7%.
As of the time of writing, the spot price of LOOKS is 7.09u. We need to wait and see, and then buy LOOKS3S at optimum times to make profit.
3. Advantages and Risks of Leveraged ETFs
Leveraged ETFs, like spot, not only can perform simple buying and selling, but also magnify your earnings. At the same time, it does not occupy part of the positions as a margin to raise or lower the forced liquidation price. The capital utilization is high, and there are no liquidation rules. Therefore, for leveraged ETF trading, the return is higher than Spot and less risky than Futures.
The second advantage is that leveraged ETFs have a compound interest effect. Due to the rebalancing mechanism of leveraged ETFs, despite the market continuous changes, the daily profit will be automatically transferred to the position and reinvested to achieve compound interest. Hence, its profit will be higher than the same leverage on Spot or Futures products.
Above is the summary of the advantages of leveraged ETFs. But whenever we choose a trading product, the most basic precondition is always that we must first understand its risks.
Although leveraged ETF products are very mature in terms of risks and returns, certain capital erosion costs may still be incurred when the market is less or highly volatile. Therefore, leveraged ETF products are more suitable for unilateral market trends.
In addition, although leveraged ETFs greatly reduce the risk of liquidation, under extreme volatilities of the market, such as continuous surging and plunging, there is a possibility that the product’s net value goes zero and the liquidation risks occur.
Therefore, regardless of the advantages of leveraged ETF, an innovative financial derivative, the risk of volatility in the cryptocurrency market is naturally present. Investors still need to be cautious.
Note: The above is only personal sharing, not investment advice.