What is Leveraged ETFA Leveraged ETF is a financial derivative derived from the traditional financial industry. It maximizes the return by tracking the rise or fall of the underlying assets by a particular multiple.
The underlying assets that leveraged ETFs track in the blockchain tracks are digital currencies that correspond to the available currencies on the market.
For example, MEXC’s 3x ETF products, BTC3L/BTC3S, where BTC represents the underlying asset which is BTC, 3 represents 3x, L represents Long, S represents Short.
If the underlying asset BTC rises by 1%, then BTC3L rises by 3%, and BTC3S falls by 3%.
Leveraged ETF products are essentially managed by professional financial teams. Each product has a certain number of futures positions behind it. The fund manager can keep a fixed leverage multiple for a certain period by dynamically adjusting the futures positions.
Merging mechanismWhen ETFs are first launched, the net value defaults to 1. When the net value falls below a certain threshold (generally 0.1U), MEXC start the merge operation to increase the price sensitivity. The net value per share of a merged leveraged ETF product will be up by 10 times, while user’s holding amount will be down to 1/10. User’s total asset will not be affected during the merge.
For example:
The net value of BTC3L is 0.03. When it falls below 0.1, the merging mechanism is triggered. Originally, 1,000 BTC3L were held with a value of 0.031000=30. After merging, the net value is 0.3 and the share becomes 100. The total value is 1000.3=30, with the asset value remains unchanged.
Rebalancing mechanismPeriodic rebalance: MEXC will rebalance the positions at 00:00:00 every day (UTC+8) to ensure the stability of the combined leverage ratio.
Threshold rebalance: If the underlying asset fluctuates beyond a given threshold compared to the previous rebalance point (current threshold: For 3x Long/Short > 15%)
For example:
$100 USD is used to purchase BTC3L. Leveraged ETF amplifies both profits and losses. Therefore, when the pegged asset BTC rose by 1%, BTC3L also rose by 3%. The profit is $3 USD.
The BTC3L leveraged value is $303 and the actual principal value is $103. Therefore, the leverage ratio is 303/103=2.94%, which is less than the agreed leverage ratio of 3% (300/100=3).
As the leverage ratio must remain at 3x, an adjustment is performed at 103*3=309. This can also be interpreted as a resale of the profit portion to balance the leverage ratio by 3x.
The rebalancing mechanism is equivalent to the system actively stopping loss and stopping profit to keep the leverage around 3x.
The risk is that if the market trend rebounds immediately after the adjustment, earnings will also be reduced because of previous stop loss.
For example, the original price of BTC is $10,000 USD. After falling by 10%, and then rising by 11% the next day to return to the original price.
BTC3L, which follows the underlying asset, BTC, fell bt 30% on the day and increased by 33% on the next day. However, according to calculations, a 30% drop requires a 42% rise to return to the original price. The difference between 33% and 42% is worn assets.
Service FeesMEXC Leveraged ETF products’ trading fee is 0.2%
Management fee: only charged at 0:00 Singapore time. Moreover, there is no charge if there are no holdings at the time of collection. MEXC charges a certain management fee per leverage to pay the fund rate generated by the portfolio (generally 0.001%. For 3x leverage product, it is 0.003%). The specific management fee can be viewed on the corresponding trading page.
Leveraged ETF AdvantageNo liquidation: Compared to futures, leveraged ETF has a rebalancing mechanism, which is equivalent to automatic stop-and-stop loss. This means that no liquidation will occur. Additionally, the price changes will not affect the holdings (not taking account of the merging mechanism).
No margin needed: Leveraged ETF can be seen as futures spot trading with an automatic stop-loss function. Leveraged ETF management fees have already included in service fees for the futures market.
Automatically compounded interest: The stop loss through the rebalancing mechanism can automatically add principal to the profit portions to increase the position and ensure compounding interest.
Simple operation: Leveraged ETF can trade like regular spot and make short profits. In addition, leveraged ETF can avoid complex leverage borrowing and repayment operations. It is a long-term financial derivative tested in traditional finance.
Leveraged ETF RiskLeverage attributes: Leveraged ETF always exhibits leverage characteristics, which has certain risks and is more novel in the digital assets industry. It is recommended that users have some professional knowledge before participating.
Short-term operation, single-sided quotation: ** Due to the rebalancing mechanism, fluctuating quotations will cause a lot of wear and tear to the leveraged ETFs. Furthermore, the longer the time, the more likely the fluctuations and changes. Therefore, leveraged ETFs are more suitable for short-term operations and single-sided quotations.
View the full article
