Vbit Leveraged ETF Trading Guide
Dear Vbit user:
Vbit will officially launch leveraged ETF trading products at 0:00 on May 13th. It is recommended that users first understand the basic content of leveraged ETFs before starting to conduct leveraged ETF trading.
Detail of Vbit leveraged ETF:
What is a leveraged ETF?
Leveraged ETF products are a type of financial derivatives that are very popular in traditional financial markets. It is a transactional product that achieves a certain multiple (such as 3 times) of the target daily asset return under the premise of a given asset (such as BTC). If the price of BTC rises by 1%, the net value of the corresponding 3-fold leveraged ETF product will rise by 3%; and the net value of the corresponding -3x product will fall by -3%.
A leveraged ETF is a perpetual product. There is no maturity date, and the price will not be completely zero, so there is no risk of liquidation. Investors can buy or sell in the secondary market at any time, and do not need to pay any margin to achieve the purpose of trading leverage.
Fixed leverage tokens are denominated in USDT, and the trading mechanism is similar to currency trading. A leveraged ETF essentially corresponds to a unit share of a fixed leveraged fund. The fund manager ensures that the fund’s return anchors a fixed target multiple of the return on the marked asset. Investors can obtain a certain multiple of the return on the target asset by trading the ETF product share . When the volatility of the underlying asset exceeds a set threshold in the reverse direction, by introducing a rebalancing mechanism, the fund manager readjusts the fund position to ensure that the fund’s net worth loss does not exceed a certain limit.
In short, through the risk control measures of the fund manager, ETF investors can avoid the worry of liquidation and obtain a certain leverage multiple of the return of the underlying asset.
Currently each token supports 3x long (3X Long) and 3x short (3X Short)
Leveraged ETF varieties:
BTC3L / USDT, BTC3S / USDT
ETH3L / USDT, ETH3S / USDT
BCH3L / USDT, BCH3S / USDT
EOS3L / USDT, EOS3S / USDT
LTC3L / USDT, LTC3S / USDT
XRP3L / USDT, XRP3S / USDT
ETC3L / USDT, ETC3S / USDT
M5–3L / USDT, M5–3S / USDT
It is M5–3L / USDT, M5–3S / USDT is a combined ETF of BTC, ETH, BCH, EOS, LTC, the combination ratio is 5: 2: 1: 1: 1.
Advantages of leveraged ETFs
The following are the advantages of leveraged ETFs that deserve attention:
Spot trading, no margin required
Users can buy leveraged ETFs on Gmex just like ordinary spot purchases, so that users are free from problems such as margin and liquidation risks. Taking 3x long BTC (BTC 3L) as an example, users only need to look at the price and net value — enter the purchase quantity — and choose to buy BTC 3L, without any other operations.
Compound interest effect, risk control
The leveraged ETF will automatically transfer the position income into the principal, that is, if the user buys a leveraged ETF that generates floating profit (there is no floating profit before rebalancing), then the next rebalance, floating profit will make the leveraged ETF position Increase, that is, increase the position three times the floating profit, making the income form a compound interest model.
At the same time, the leveraged ETF has its own risk control mechanism (see the rebalancing mechanism section for details). For example, if a user triples the BTC contract, and then BTC drops by 33%, then the user’s position will no doubt be liquidated, leaving nothing. However, if the user buys BTC 3 times longer (BTC 3L), the leveraged ETF will fall according to market conditions and adjust the position through the rebalancing mechanism to avoid the user position being liquidated. Even if the BTC price drops 33%, the user position still has Asset surplus.
Price mechanism of leveraged ETF
The essence of leveraged ETF is to ensure that ETF holders enjoy a fixed target multiple of the daily return of the underlying asset through the fixed leveraged fund’s returns. This fixed leveraged fund is managed by the platform or fund management approved by the platform. The platform announces the net value of the fund in real time to maintain a high degree of transparency.
In theory, the fund’s net worth is the fair transaction price of ETF shares in the secondary market. However, due to fluctuations in market sentiment, there may be a situation where the trading price of the secondary market deviates from the fair price (net value of the fund) during a certain period, resulting in a certain premium.
When a premium exists, there will be arbitrage opportunities, and arbitrageurs in the secondary market can gradually eliminate the premium through arbitrage operations to ensure that the token trading price closely follows the fair price. For ordinary users, it should be noted that their order price should not deviate too much from the net value, otherwise they will suffer greater losses. At the same time, when the net value price is lower than a certain threshold (the initial value is 0.05U), the platform will perform a merge operation on the variety (the net price will be 10 times before the merger, but the corresponding quantity will also become 1/10 before the merger, The user’s total assets will not be affected in any way) to improve the sensitivity of price changes and optimize the trading experience.
Calculation of fund equity
A fixed leverage fund is essentially an actively managed fund, with its return in each period anchored to M times the return on the underlying asset. As the price of the underlying asset changes, the fund position at the beginning of each cycle must be adjusted to ensure that this goal can be achieved. The position adjustment is mainly based on the net value of the fund at the beginning of each cycle to adjust the position appropriately, which is the risk exposure of the current cycle anchored to M times the corresponding asset risk exposure. If the net value at the beginning of the current period is S (tk), the exposure set at the beginning of the period is the equivalent USDT position of M * S (tk).
Rebalancing mechanism of leveraged ETF
Under normal circumstances, the platform will rebalance the position at 00:00:00 (UTC + 8) every day to ensure that the combined leverage ratio does not deviate too much from the agreed ratio. And when there is severe fluctuation, if the target asset’s fluctuation range exceeds the given threshold compared to the previous rebalance point (in the initial stage, we set the threshold to 15% for 3 times long and short, if the product of other multiples in the future, the threshold may be Different), we will also carry out temporary rebalancing to control the risk of the portfolio. The temporary rebalancing is only for the party that has suffered a loss due to this fluctuation, that is, if BTC rises to 15%, we will rebalance the -3x leveraged ETF and do not adjust other products. Please note that if the market trend continues after triggering irregular rebalancing, the user’s loss will become smaller, but if the market trend reverses immediately after the trigger, the speed of the product’s rebound will also be weakened due to the rebalanced lightening of positions.
As mentioned earlier, if the daily leveraged ETF makes a profit, it will reinvest the profit. If there is a loss, some positions will be sold to recover to 3 times leverage to avoid the risk of forced liquidation.
Changes in ETF yield under different circumstances:
Taking the positive BTC tripled bullish product as an example, if the daily trend of BTC is + 10%, + 10%, + 10%, + 10%, then the 4-day yield of the product is 185%, which is higher than The 4th spot gain is 3 times 44%; if the daily trend of BTC is -10%, -10%, -10%, -10%, then the product ’s 4th loss is 76%, which is less than the 4th spot loss 3 times 35%; if the daily trend of BTC is + 10%, -10%, + 10%, -10%, then the product ’s 4-day rate of return is -17%, to underperform the 4-day spot rate of return -3 times of 2%.
Therefore, when the time spans a rebalancing cycle, the leveraged ETF cannot guarantee the relationship between the multi-day cumulative rate of return and the fixed multiple of the spot rate of return. Generally speaking, under the trend situation, the performance of leveraged ETFs will be better than the declared leverage multiple (that is, the cumulative increase of ETFs in the same direction will exceed 3 times the target rate of return, while the decline of ETF in the opposite direction will be less than 3 times the target rate ), And in a volatile market, the performance of leveraged ETFs will be worse than the stated leverage multiples.
Leveraged ETF rates
The leveraged ETF trading pair is a spot transaction, and the transaction fee is as follows:
The trading fee for trading leveraged ETF products in Gmex is 0.2%, and we will charge a certain management fee per leverage every day to pay for the fund rate generated by the fund portfolio (generally 0.1%, and will be adjusted according to market fluctuations in the future , The specific management fee for each subject can be viewed on the corresponding transaction page), transaction fees and other necessary fees. The management fee will be reflected in the change in net worth, that is, it will be presented by deducting the value of the corresponding leveraged ETF, and will only be charged at 0 o’clock Singapore time. If the product is not held at that time, no fee will be incurred.
Applicable scenarios of leveraged ETF
Due to the adjustment mechanism of the leveraged ETF, its most suitable market situation is: unilateral market (or trend market), the performance and advantages of the leveraged ETF will be very obvious at this time; ) Under market conditions, leveraged ETFs will wear more.
Therefore, to reduce the risk exposure, we must first make a correct judgment on the market price trend, and then pay attention to the direction of market fluctuations, whether it is a unilateral market.
Vbit leveraged ETF product elements (Conclusion )
- Product Brief
Fixed leveraged ETF products anchor a fixed target multiple of the underlying asset return. For example, the daily earnings of BTC with a 3x leverage are 3 times the daily earnings of the underlying asset of BTC / USDT. Among them, the daily rate of return is defined as the rate of return for a one-day period between UTC + 8 00:00:00 and UTC + 8 00:00:00 the next day. Fixed-leveraged ETFs are perpetual products. There is no maturity date, and the price will not be completely zero, so there is no risk of liquidation. Investors can buy or sell tokens in the secondary market at any time. Fixed leveraged ETFs are denominated in USDT, and the trading mechanism is similar to currency trading.
A fixed leveraged ETF essentially corresponds to a unit share of a fixed leveraged fund. The fund manager ensures that the fund returns anchor a fixed target multiple of the underlying asset return. Investors can obtain a specified multiple of the underlying asset by trading a fixed leveraged ETF Income. When the volatility of the underlying asset exceeds a set threshold in the reverse direction, by introducing a fuse mechanism, the fund manager readjusts the fund position to ensure that the loss of the fund’s net worth and token value does not exceed a certain limit. In short, through the risk control measures of the fund manager, token investors can be relieved of the worry of liquidation. And obtain a certain leverage multiple of the return of the underlying asset.
2. Fund Net Worth and Fair Price
The essence of the fixed leveraged ETF is to ensure that holders enjoy a fixed target multiple of the daily return of the underlying asset through the fixed leveraged fund’s returns. This fixed leveraged fund is managed by the platform or a fund manager approved by the platform. The platform announces the net value of the fund in real time to maintain a high degree of transparency. In theory, the fund’s net worth is the fair transaction price of tokens in the secondary market. However, due to the fluctuation of market sentiment, there may be a case where the transaction price of the secondary market deviates slightly from the net value at a certain moment, resulting in a certain premium. At this time, please pay attention to the risks caused by the price deviating from the net value.
Calculation of fund equity
Taking one day as a time period (UTC + 8 00:00:00 to UTC + 8 00:00:00 the next day), the end of the kth period is recorded as tk, k = 0,1,2, …, where t0 = 0. Let the initial net value of the unit fund be 100 USDT, that is, S (0) = 100 USDT.
S (0): initial value of the fund;
S (t): the net value of the fund at time t, t ≥ 0;
P (0): the price of the underlying asset at the initial moment;
P (t): the price of the underlying asset at time t;
M: target leverage multiple, which can be 2, 3, -1, -2, -3
The returns of the fund and the underlying asset in period k are respectively
The goal of the fixed leverage fund is to make its rate of return for each time period M times the rate of return on the underlying asset, that is
Rs (k) = M × Rp (k), k = 1,2,…
The net value of the fund at time v in the k-th cycle is calculated by the following formula:
Investors can purchase a certain amount of tokens through the secondary market at any time to hold a corresponding share of funds. However, if an investor purchases a certain number of tokens at a certain point v in the k-th cycle (between tk-1 and tk), the rate of return from the token holding to tk does not mean that the corresponding underlying assets are in the same M times the rate of return. Only when the investor buys tokens at tk-1 can the current return rate be M times the corresponding asset return rate.
3. Timing rebalance
A fixed leverage fund is essentially an actively managed fund, with its return in each period anchored to M times the return on the underlying asset. As the price of the underlying asset changes, the fund position at the beginning of each cycle must be adjusted to ensure that this goal can be achieved. Position adjustment is mainly based on the fund’s net value at the beginning of each cycle to adjust the position appropriately, so that the risk exposure of this cycle is anchored corresponding to the M times of the corresponding asset risk exposure. If the net value at the beginning of the current period is S (tk), the exposure set at the beginning of the period is the equivalent USDT position of M × S (tk).
4. Irregular rebalancing mechanism
In order to protect the interests of investors and avoid a sharp decline in the fund’s net worth and token prices, the fund has set up an irregular rebalancing mechanism. When the fluctuation of the underlying asset in the opposite direction within one day is greater than or equal to a certain set threshold, the irregular rebalancing mechanism will be triggered. After the irregular rebalancing mechanism is triggered, the fund manager will access to adjust the position. The adjusted risk exposure is M times the net value of the fund at the time of the meltdown. This process will reduce the position of the fund appropriately. In other words, the position adjustment mechanism after the occasional rebalancing readjusts the leverage to M times based on the fund’s net worth at the time. The role of this mechanism is to ensure that the fund’s net worth and token value will not return to zero, and the loss of investors in the wrong direction can be controlled within a certain range.
5. Rate
The transaction fee for buying and selling leveraged ETF products on Vbit is 0.2%. At the same time, we will charge a management fee of 0.1% per leverage every day to pay for the necessary fund fees and transaction fees. The management fee will be reflected in the change in net worth, that is, it will be presented in the form of “deducting the value of the corresponding leveraged ETF”, and will only be charged at 0:00 Singapore time. If you do not hold the product at that time, there will be no fee.
Statement:
Leveraged ETFs are emerging financial derivatives. The above does not constitute investment advice, please pay attention to risk control.
The leveraged ETF greatly reduces the liquidation risk of liquidation, but in extreme market conditions, there is a risk of approaching zero and liquidation. Please pay attention to the difference between the net value and the price to avoid losses.
Vbit Operation team
2020.05.15
