Understanding How BTC² Perpetual Index Outperforms 2x Leverage in Risk and Returns.
Let’s consider some scenarios where the price of Bitcoin BTC is $100
The BTC² Perpetual Index is calculated based on the squared price of BTC.
To calculate the value of the BTC² Perpetual Index imagine BTC is trading at $ 100, we simply square the BTC price:
BTC² Index Value = (BTC Price)²
BTC² Index Value = ($ 100)²
BTC² Index Value = $ 10,000
So, when BTC is trading at $ 100, the BTC² Perpetual Index will be valued at $ 10,000.
The BTC² Perpetual Index is designed to provide exposure to the second-order market movements of Bitcoin (BTC) without directly trading the underlying asset. It offers advantages over traditional leverage products in terms of both risk and returns.
Let’s explore the two scenarios provided to understand how the BTC² Perpetual Index outperforms 2x leverage.
Scenario one: BTC² Perpetual Index vs. 2x Leverage Position
In this scenario, a trader opens a 2x leverage position on Bitcoin when its price is $100. This means the trader effectively controls $200 worth of BTC. On the other hand, another trader takes a position on the BTC² Perpetual Index when BTC is at $100 without using any leverage. The BTC² Index Value, reflecting the squared price of BTC, would be $10,000.
If the BTC price increases by 10% to $110, the 2x leverage position would result in holdings of $220, reflecting a 20% increase. However, the BTC² Index Value would be $12,100, reflecting a 21% increase.
Thus, the trader who took a long position on the BTC² Perpetual Index would enjoy a higher return compared to the 2x leverage position without having any liquidation price.
Similarly, if the BTC price triples to $300, the 2x leverage position would triple to $600, while the BTC² Index Value would be $90,000, representing a ninefold increase.
Once again, the BTC² Perpetual Index outperforms the 2x leverage position in terms of returns.
By directly tracking the squared price of BTC, the BTC² Perpetual Index eliminates the risks associated with liquidation and the costs of borrowing associated with leveraged positions. It provides a more straightforward and transparent way to gain exposure to the second-order price movements, offering traders a more stable and secure trading experience.
Scenario two: BTC² Perpetual Index vs. Conventional Leverage Product during Market Drop
In this scenario, the focus is on risk management during a market drop of 50%. With a conventional leverage product such as 2x leverage, losses are too magnified by 2x. If the BTC price drops by 50%, the 2x leverage position would lose 100% of its value, resulting in a complete loss for the trader.
However, with the BTC² Perpetual Index, the index value would also experience decline 75% as the BTC price drops to $ 50 the Perpetual Index is now worth $ 5⁰² that is $2,500 . The important thing to note here is there is no extra money in the trade moreover the Value of BTC² only goes to Zero when BTC goes to Zero.
The funding mechanism of the BTC² Perpetual Index plays a crucial role in managing risk during market drops. The funding payments exchanged between long and short positions help stabilize the index price and mitigate the impact of extreme price movements.
Unlike conventional leverage products that can expose traders to liquidation and complete loss during a market drop, the BTC² Perpetual Index offers a more robust risk management approach. Traders can maintain their positions, manage their risk exposure, and have a better chance of recovering from market downturns.
In summary, the BTC² Perpetual Index provides a more straightforward and transparent way to gain exposure to the second-order market movements of Bitcoin (BTC). It outperforms traditional leverage products by eliminating liquidation risks, reducing borrowing costs, and offering better risk management during volatile market conditions.
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