The change % of a leveraged token is decided by its underlying spot price. If the spot price rises or falls by 1%, the leveraged token will rise or fall by 3%. When trading with the leveraged token, users do not need to pay any margin. Though ETF token charges a 0.3% management commission per day, it is taken from the underlying assets and there is no changes reflecting on the ETF token quantity. For FTX management commission, it is about 10.9% per year. By simply buying or selling the leveraged token, you can get leveraged exposure like trading with leverage.
The underlying asset of leveraged token is perpetual contract, for simplicity, you can consider it as spot trading. Compared with opening your own position at perpetual contract, using leveraged token can benefit from lower fee and less risk as the result of asset management optimization. Leveraged token is a high-risk product any way owing to its leverage nature. Please trade within your financial capacity and make informed decision.
FTX leveraged token
- BULL: 3 x leverage for long position (example: BTCBULL standards for going long BTC with 3 X leverage ; for better understanding, BULL means a bull run)
- BEAR: 3 x leverage for short position(example: BTCBEAR standards for going short BTC with 3 X leverage; for better understanding, BEAR means a bear run )
Leveraged ETF token
- 3L： 3 x leverage for long position (example: ETH3L standards for going long ETH with 3 X leverage ; for better understanding, L means a long position)
- 3S：3 x leverage for short position (example: ETH3S standards for going short ETH with 3 X leverage ; for better understanding, S means a short position)
As FTX and ETH is similar, we will use FTX as an example in the following narrative.
Take BTCBULL token price movement as an example. When BTC rises by 1%, the BTCBULL will rise by 3% and BTCBEAR fall by 3%; when BTC falls by 1%, the BTCBULL will fall by 3% and BTCBEAR rise by 3%.
Price of leveraged token
The price of the leveraged token depends on the dollar + contract basket package, which does not equal to the underlying price X 3 or 1/3.
Dollar reserve + contract quantity X spot price=price of leveraged token
For EOSBEAR , if short 27.14775 EOS at other exchanges, there is 131.4989 USD reserve. If the spot price of EOS is 3.638 USD, the price of the leveraged token is 131.4989 + 3.638 × -27.14775 = 32.73 usd
The leveraged token will convert the profit or loss into its principal automatically. That is, if there is unrealized profit generated, the profit will increase the position as well, making the earnings a compound interest model.
Vice versa, if there is a loss, the unrealized loss will lead to a position decrease automatically and thus reduce the loss. For example, a user go long on ETH contract. A month later, ETH decreases by 33%, and his contract would be liquidated and left the nothing. As the leveraged token will reduce the position automatically if price drops, the same user can still have asset even after a 33% drop. However, as the position has been reduced during the drop, so the leveraged token will still suffer a loss even if the underlying goes back to the original price later.
The Position Adjustment mechanism
At 00:02:00 UTC, FTX leveraged token will start a position adjustment by FTX exchange.
(ETF product do it at 0 UTC+8)
After position adjustment, the leveraged token will restore to its target leverage.
If a BTCBULL token ‘s underlying basket is -18,743 dollar and+3.2 BTC, and BTC is traded at the 9500 dollar. The net asset value of BTCBULL is 11,500 dollar (formula: -18,743 dollar+3.2 *9500 dollar =11,657 dollar); BTC exposure is 30,400 dollar per token (formula: 3.2*9500 dollar =30,400 dollar). The leverage is 2.74X( formula: 30,400 dollar/11,657 dollar=2.607), and more BTC should be bought to restore a 3X leverage.
As above-mentioned, if unrealized profit is generated, the earning will be reinvested; if loss, the position will be reduced to make it back to 3 X leverage to avoid liquidation.
Advantages and Disadvantages of leveraged token
1. No liquidation
Leveraged token is traded at spot market as it is still a token in essence. It will not be “liquidated”. In extreme case, the price of the token will be approximate to zero, but barely happens.
2. No margin
Margin is needed when open a leverage position traditionally. Leveraged token does not need margin at all. However, management commission is charged.
3. Withdraw anytime
FTX leveraged token is a ERC-20 token and can be withdrawn anytime. User can deposit or withdraw it using a wallet. ETF leveraged token doesnot support deposit or withdrawal yet.
4. Compound interest and de-leveraging.
In the one-sided bull market, your long position will get more profit than an ordinary 3X leveraged trading as your profit will be used to add position. When the market is sliding, your long position will not be liquidated as the position will decrease automatically.
1. High risk
Leveraged token is new and is of“leveraged’ nature. It is of high risk.
2. Not suitable for long-term investment
Leveraged token is for hedging or short-term trading in one-sided market by professional traders.
It is not a good choice for middle or long-term investment as its position adjustment mechanism will pose more frictions the longer time along with rises and falls.
3. Management commission
The funding payment on perpetual contract is exchanged between shorts and longs. While the leveraged token will be charged 0.3% management commission per day for ETF; FTX management commission is about 10.9% per year and charged when the position is adjusted, reflecting on the price directly.
Differences between FTX and ETF
The two products are similar. The long term earning performance is different and their algorithms are different.
This article is not trading advice or suggestions and should not be taken as trading advice or suggestions. Leveraged token is of high risk , please trade it within your financial capacity and make informed decision.