Why can leveraged ETFs be risk hedging in a market that prevents bubbles?
The U.S. Federal Reserve (Fed) announced on May 5 that it would raise the benchmark interest rate by 50 basis points to a range of 0.75%-1.00%. Then, other Fed officials said that “the possibility of raising interest rates by 75 basis points is not ruled out.” As a result, the price of BTC, which had risen briefly, went down again.
The de-pegging of UST from USD accelerated the downward price movement of BTC, causing BTC to drop below USD 30,000 at one point. According to CoinGecko data, BTC’s 7-day low fell by 16.8% and is now priced at $30,942. In the process of eradicating market bubbles, as investors do we have other more suitable products to help maintain our profitability or hedge risks?
Understanding leveraged ETFs
The answer is, of course: yes. Leveraged ETFs are good options.
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 for Bitcoin. If the BTC price goes up/down by 1% on a particular 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 multiple profits by going long or achieve the same profits by going short.
Screenshot from MEXC Global On May 5, when BTC fell from $40,000, BTC3S started to rise from $0.63. Suppose you accurately judge the trend of BTC at this time and buy BTC3S. When BTC3S reaches a high of $1.35, you can get a 114% return.
In general, be the market falling or rising, we, from the perspective of the industry, welcome traders to buy BTC3L and go long in BTC’s unilateral rising trends. This is out of our 100% confidence in the cryptocurrency industry.
Why are leveraged ETFs a good choice?
From a trader’s viewpoint, you can hold the spot and wait for the market to pick up in a falling market. You can also choose futures, margins, and leveraged ETF products for risk hedging. Compared to futures products:
- Leveraged ETFs do not require margin, meaning that your positions won’t be occupied. As a result, its capital utilization is high.
- Leveraged ETF trading is as simple and convenient as spot trading.
- Leveraged ETFs do not have liquidation prices.
- Compound interest effect. Due to the rebalance mechanism of leveraged ETFs, despite the market’s continuous change, the daily profit will be automatically transferred to the position and reinvested to achieve compound interest. Hence, its profit will be higher than that of margins or futures products of the same leverage.
3. What should I pay attention to when trading leveraged ETFs?
Due to the rebalance mechanism, certain fee rate erosion may be incurred in leveraged ETFs. Therefore, it is not suitable for a repeated volatile market but more suitable for unilateral market trends, such as unilateral uptrends and unilateral downtrends.
The rebalancing mechanism is divided into periodic rebalancing and non-periodic rebalancing. MEXC’s leveraged ETF products will be rebalanced regularly at 0:00 Singapore time every day.
Periodic rebalancing is essentially what the platform does to maintain the 2, 3, 4, or 5 times leverage of an ETF. In addition, MEXC also needs to carry out risk hedging on other derivatives platforms to avoid the risks caused by the sharp rise and fall of prices and maintaining the leverage ratio and hedging requires a certain fee rate erosion.
Non-periodic rebalancing refers to the scenario where the position of the party that suffers a loss will be adjusted when the benchmarked spot price rises or falls by more than a certain range. For example, BTC rises by 15% in a short time, resulting in BTC3S falling by 45%. This triggers a non-periodic rebalancing. Some positions will be sold, and the leverage will then be restored to 3x to control the risk of the position.
Interested in MEXC ETF Products?
MEXC Exchange provides you with nearly ten forms of ETF index trading combinations to meet your flexible index trading needs. Read more hot news about them in MEXC ETF.
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