Understanding Leveraged ETF Token (Chapter II)

What scenario do leveraged ETF apply to?

Leveraged ETFs have advantages at one- sided market. In a sideways market, more frictions will occur. Lets take BTC3L as an example to view its performance in different markets.

*3X BTC refers to a 3X leveraged BTC_USDT perpetual contract product.

I. Side-ways rising market

As you can see, after continuous rising, the leveraged ETF performs better than a common 3x leveraged perpetual contract. How does that happen? Let’s break it down into small calculations:

Day 1, BTC price rises from $200 to $210, increased by 5%. NAV of BTC3L becomes $200(1+5%× 3)=$230;

Day 2, BTC price rises from $210 to $220, increased by 4.76%. NAV of BTC3L becomes $230× (1+4.76%× 3)=$262.84;

In two days, the leveraged ETF has increased by

($262.84 - $200)/ $200*100%=31.4% , that is greater than 30%

II One-sided sliding market

In a declining market, the leveraged ETF loses less than a perpetual contract.

Day 1, BTC falls by 5%, the NAV of BTC3L: $200 (1-5%×3)=$170

Day 2, BTC continue to decrease, fall by 5.26% , the NAV of BTC3L : $170 (1-5.26%×3)=$143.17 .

In two days, leveraged ETF has decreased by

($143.17 - $200)/ $200*100%= -28.4% , that is less than -30%

III Sideways market: rise and fall

Leveraged ETF will not back to the initial price even if its underlying back to initial price after rises and falls. In a sideways market, leveraged ETFs have no advantage over 3X leveraged perpetual contract in performance.

Day 1, BTC rises from, $200 to $210, increased by 5% and the NAV of BTC3L is

$200 (1+5%×3)=$230

Day 2, BTC falls by 4.76 % back to $200. NAV of BTC3L becomes

$230 (1-4.766%× 3)=$197.16

In two days, the leveraged ETF changes

($197.16.- $200)/ $200*100%=-1.42%, that is less than 0%

IV Sideways market: fall and rise

Leveraged ETF will not back to the initial price after a fall and rise.

Day 1, BTC falls by 5% and the NAV of BTC3L is

$200 (1-5%×3)=$170

Day 2, BTC increases by 5.26 % back to $200 . NAV of BTC3L becomes

$170 (1+5.26%× 3)=$196.83

In two days, the leveraged ETF changes

($198.83- $200)/ $200*100%= -1.59%, that is less than 0%

Risk Warning: the article only give a simplified analysis of price movement in principle and should not be taken as investment advice or suggestion. Leveraged ETFs are high risk derivative owing to their leveraged nature. Please trade within your financial capacities.