Leveraged Tokens in Gate.io

About Leveraged Tokens

Gate.io has introduced ETF leveraged tokens. The only difference between leveraged tokens and traditional tokens is that leveraged tokens have leveraged properties. All leveraged tokens have counterparts on the spot trading market.

ETF products are hedged and managed on perpetual contracts.A daily management fee of 0.1% is charged. (The management fee rate varies with the actual cost. Please refer to Announcements for the latest information). Management fees make up for costs such as contract handling fees and funding fees, while contract funding fees are not charged. Through capital management optimization, users’ actual leverage expenses and risks are reduced.

Users do not need to pledge collateral when trading leveraged tokens, but ETFs will incur daily management fees of 0.1% (management fees are collected from management funds and are not directly reflected in the users trades). Leveraged tokens essentially correspond to perpetual contracts, which can also be conveniently understood as spot trading. Compared with directly participating in perpetual contract trading, leveraged tokens strive to optimize capital management to reduce users actual leverage expenses and risks. Leveraged tokens are still categorized as high-risk products. Please make sure you understand the risks before trading leveraged tokens.


ETF leveraged tokens

3L: 3-time leveraged long bullish token
Example: ETH3L is the 3-time leveraged long bullish ETH token.
3S: 3-time leveraged short bearish token
Example: ETH3S is the 3-time leveraged short bearish ETH token.


Position adjustment mechanism of leveraged tokens

When ETF products follow up the profit and loss and adjust the leverage back to the targeted leverage every day, if profits are made, positions will be opened; if there are losses, positions will be reduced. No collateral is needed for leveraged token trading. Through simple buying and selling of leveraged tokens, users can generate leveraged gains, just as in margin trading.


Rules for 3X leveraged ETF

1.Irregular rebalancing: When the real-time leverage ratio exceeds 3, irregular rebalancing will be triggered and the position adjustment mechanism will adjust the leverage ratio to 2.3.

2.Regular rebalancing: 00:00UTC+8 every day is the regular rebalancing time. When the real-time leverage ratio goes below 1.8 or above 3, or the fluctuation rate (calculated with contract index price) exceeds 1% (because of a significant increase or decrease in the underlying currencys price in the last 24 hours), the position adjustment mechanism will adjust the leverage ratio to 2.3.

3.The 3-time leveraged ETF has the targeted leverage of 2.3 times in practice, in an effort to lower the market fluctuation rate and minimize long-term friction costs. On a one-sided market, because the profits made will be used to add more positions and stop-loss will be triggered when losses are incurred, ETF products would appear to perform well, but friction costs can be severe due to market fluctuations. Therefore, ETF products are good for short-term hedging instead of long-term holding.


Rules for 5X leveraged ETF

1.Irregular rebalancing: When the real-time leverage ratio exceeds 7, irregular rebalancing will be triggered and the position adjustment mechanism will adjust the leverage ratio to 5.

2.Regular rebalancing: 00:00UTC+8 every day is the regular rebalancing time. When the real-time leverage ratio goes below 3.5 or above 7, or the fluctuation rate (calculated with contract index price) exceeds 1% (because of a significant increase or decrease in the underlying currencys price in the last 24 hours), the position adjustment mechanism will adjust the leverage ratio to 5.

3.The net asset value of 5-time leveraged ETF products is extra vulnerable to the price changes of the underlying currency. Logically, irregular and regular rebalancing happens more frequently for 5-time leveraged ETF products, which also suffer more from friction than 3-time leveraged ETF products and are only good for short-term hedging. Before investing in ETF leveraged products, please be informed of the differences between 5X and 3X leveraged tokens and choose wisely.


Advantages of leveraged tokens

Free from liquidation

Leveraged tokens are essentially token pairs on the spot market and are therefore free from liquidation. Even if the price of a leveraged token falls from 100USD to 1 USD, the quantity that the trader holds will not change. If considerable losses have been incurred, it may trigger the automatic position reduction mechanism. Only in rare cases, the price of leveraged tokens may approach 0.


No collateral needed

In conventional margin trading, collateral is a must for traders to generate leveraged gains, which can be achieved by trading leveraged tokens without collateral. A certain management fee will be charged.

Deposit and withdrawal of ETF leveraged tokens are not possible yet.

Automatic profit compound and automatic position reduction
When there is a one-sided rise on the market, 3X leveraged tokens can generate more profits than conventional margin trading with 3X leverage. The reason for this is that the profits made are automatically used to purchase more leveraged tokens to generate more profits. When the market falls, liquidation will not happen and automatic position reduction will be triggered instead to stop loss.


Disadvantages of leveraged tokens

High risk

Leveraged tokens are new products with leveraged properties, which come with considerable risks.


Not a good fit for long-term investment

Leveraged tokens are only fit for professional investors to use for risk hedging or short-term one-sided market investment. They are not fit for medium and long-term investments. Because of the existence of the position adjustment mechanism, the risk of holding leveraged tokens for a long time is extremely high. The longer the holding time, the greater the volatility and friction costs.


Fund Management fee

The funding fees of perpetual contracts are paid between traders on opposite sides of the contract, but when trading leveraged tokens a fixed daily rate of management fee will be charged: a daily management fee of 0.1% is charged.

All content above is not any advice for investment. Leveraged tokens are high-risk products. Please make sure you have a good understanding of the risks before trading leveraged tokens.


Please be w*arned:

The cryptocurrency market is volatile. 3X and 5X leveraged ETF products will increase price volatility and bring greater risks of loss. Please be sure to understand the risks in detail and trade wisely. Because of regular and irregular position adjustments, the rise and fall over a certain period of time is not always the targetted leverage. ETF products are hedged through perpetual contracts. If profits are made, positions will be opened; if there are losses, positions will be reduced. ETF products follow up the profit and loss and adjust the leverage back to the targeted leverage on a daily basis. Friction costs can be quite considerable in a fluctuating market. Due to the position adjustment mechanism and position holding costs, leveraged ETF products are not a good long-term investment. Large prices fluctuations and high risks are characteristics of ETF products. Please invest carefully.

Guide to Leveraged ETF Products (Chapter I)

Q1 : What are leveraged ETF products?

Leveraged tokens are similar to conventional ETC products on the stock market. They track the price fluctuations of the given target asset.

These price fluctuations are about 3 or 5 times that of the underlying assets market. Different from conventional margin trading, users do not need to pledge collateral when trading leveraged tokens.

Users can achieve the purpose of trading on margin through simple buying and selling of leveraged tokens.

Each leveraged ETF product corresponds to a contract position, which is managed by fund managers.

Using leveraged ETF products allows you to easily build your own constant leverage investment portfolio without having to learn about the specific mechanisms.


Q2 : What is the underlying asset?

A : The name of a leveraged ETF product consists of the name of its underlying asset and the leverage ratio. For example, the underlying asset of BTC3L and BTC3S is BTC.


Q3 : How much is the total volume of ETF products?

Similar to perpetual contracts, leveraged ETF products are financial derivatives, not typical crypto tokens. So there is no "total volume" or “burned volume" for leveraged ETF products.


Q4 : How do leveraged ETF products amplify gains?

Leveraged ETF products amplify losses and gains by amplifying the price fluctuations. Say after position adjustment, the price of BTC rises by 5%, (not considering the possibility of irregular rebalancing getting triggered), the price of BTC3L will rise by 15% and BTC3S will fall by 15%.


Q5 : How are leveraged ETF products different from margin trading?

1.Margin trading is to amplify gains and losses by adding margin loans to total investment. The leverage ratio multiplies the volume of assets that a user holds. Leveraged ETF products amplify gains by amplifying the price fluctuations of the underlying assets price. The leverage ratio is reflected in the price fluctuations. 2.Leveraged ETF products do not require traders to pledge collateral or borrow loans. There is no risk of liquidation when trading leveraged tokens.


Q6 : How are leveraged ETF products different from perpetual contracts?

1.Trading leveraged ETF products does not require collateral and is free from liquidation. 2.Fixed leverage ratio: The actual leverage in the perpetual contract varies with the fluctuation of the position value. Positions of leveraged ETF products are adjusted on a daily basis. The leverage ratio almost always stays between 3 and 5.


Q7 : Why are leveraged ETF products free from liquidation?

Fund managers of Gate.io adjust futures positions dynamically so that leveraged ETF products can maintain a fixed leverage ratio for a certain period. When leveraged ETF products are profitable, positions will be increased right after position adjustment. In the event of a loss, positions will be reduced, so as to eliminate the risk of being liquidated. Note: Position adjustment is to adjust the contract positions behind the ETF products. Traders currency holdings do not change.


Q8 : When are position adjustments scheduled?

For 3X leveraged ETF products: 1.Irregular rebalancing: When the real-time leverage ratio exceeds 3, irregular rebalancing will be triggered and the position adjustment mechanism will adjust the leverage ratio to 2.3. 2.Regular rebalancing: 00:00UTC+8 every day is the regular rebalancing time. When the real-time leverage ratio goes below 1.8 or above 3, or the fluctuation rate (calculated with contract index price) exceeds 1% (because of a significant increase or decrease in the underlying currencys price in the last 24 hours), the position adjustment mechanism will adjust the leverage ratio to 2.3.

For 5X leveraged ETF products: 1.Irregular rebalancing: When the real-time leverage ratio exceeds 7, irregular rebalancing will be triggered and the position adjustment mechanism will adjust the leverage ratio to 5. 2.Regular rebalancing: 00:00UTC+8 every day is the regular rebalancing time. When the real-time leverage ratio goes below 3.5 or above 7, or the fluctuation rate (calculated with contract index price) exceeds 1% (because of a significant increase or decrease in the underlying currencys price in the last 24 hours), the position adjustment mechanism will adjust the leverage ratio to 5.


Q9 : Why are there management fees?

Gate.ios 3S and 5S ETF products come with a daily management fee of 0.1%.The daily management fee includes all costs incurred by trading leveraged tokens, including handling fees of contract trades, funding fees, and frictional expenses due to price differences when opening positions, etc.

The 0.03% daily management fee charged in FTXs ETF products does not include any of the fees mentioned above. Ever since ETF products were first launched on Gate.io, excluding handling fees in spot trading from the calculation, management fees Gate.io charges in ETF products have been unable to cover all of the costs. Gate.io will continue to pay the extra cost for users instead of taking it from the net asset value (NAV).

Soon Gate.io will launch products such as combined ETF products and low-leverage reverse ETF products. Through unique technical optimization, they can greatly reduce costs, make trading easier and lower management fees.


Q10: Why is the net asset value of ETF products that end with "BULL" and "BEAR" is not displayed?

The ETF products ending with "BULL" and "BEAR" are not managed by Gate.io. Gate.io only provides spot trading services and cannot display NAV in real-time. Please be sure to fully understand the risks before trading ETF products. The deviation between the trading prices and NAV can be larger than expected due to insufficient liquidity in the market. BULL and Bear products are going to be delisted on Gate.io soon. To learn more about these products, please refer to FTXs product manuals.


Q11: What is net asset value (NAV)?

Net asset value represents the net market value of the currency entity. The formula for calculating NAV: Net asset value (NAV) = NAV of the previous rebalancing point(1+price change of the underlying currencytargeted leverage ratio)

Note: NAV at the previous rebalancing point refers to the NAV of the positions after the last position adjustment.

The actual trading price of leveraged ETF products in the secondary market is anchored to the NAV of the currency. There is a certain deviation from the NAV, although the deviation will not be too large. For example, when the NAV of BTC3L is $1, the trading price in the secondary market can be $1.01, or $0.09. Gate.io lists the NAV of leveraged ETF products and the latest trading prices at the same time so that users can notice the potential loss when buying/selling leveraged tokens at prices deviating too much from the NAV.


Q12 : Where is the 3-time price fluctuation amplification reflected exactly in Gate.ios leveraged ETF products?

The price fluctuations of leveraged ETF products are the 3-time amplification of the price fluctuations of the underlying currency, which is reflected in the change of NAV. For example, BTC is the underlying currency of BTC3L and BTC3S. The price of BTC in a certain time period on a trading day (the price at 00:00 is the opening price) and the NAV of the corresponding time period are as follows: The price of BTC rises by 1%, NAV of BTC3L increases by 3%, NAV of BTC3S decreases by 3%; The price of BTC falls by 1%, NAV of BTC3L decreases by 3%, NAV of BTC3S increases by 3%.


Q13 : How are the price fluctuations calculated in Gate.ios leveraged ETF products?

The fluctuations are calculated based on the NAV. Lets take the intraday fluctuations as an example:

Table for intraday price fluctuation rate of leveraged ETF products underlying asset 3L 3S


Q14 : Does the position adjustment mechanism (rebalancing) increase/decrease the number of position holdings?

No. Position adjustments are made by Gate.io to the contract positions in order to maintain the leverage ratio at 3. Position holdings of the traded currency do not change.

Every time a position is adjusted, the calculation base of the NAV will change. For example: When the positions are adjusted at 00:00, the NAV is $1, then the NAV of the previous rebalancing point is $1. The current NAV calculation formula is $1×{1+ price change of the underlying currency*targeted leverage ratio}.

Before the next position adjustment, the NAV is always based on $1 and changes with the fluctuations of the underlying currency.

If an irregular position adjustment is triggered when the NAV becomes $0.7, then after the adjustment, the NAV of the previous rebalancing point becomes $0.7, and the current NAV is calculated as $0.7×(1+ price change of the underlying currency* targeted leverage ratio).


Q15 : What is irregular rebalancing?

In the event of extreme price fluctuations in the market, in order to prevent contract hedging and liquidation, irregular rebalancing will be triggered.

Before 10:00 on March 16, 2020, Gate.io adopts a price fluctuation rate of 15% (positive or negative) compared with the previous rebalancing point as the irregular rebalancing threshold.

Because the cryptocurrency market has been quite volatile, and irregular rebalancing is triggered more frequently. From 10:00 on March 16, 2020, Gate.io will use a price fluctuation rate (positive or negative) of 20% compared to the last rebalancing point as the threshold.

Guide to Leveraged ETF Products (Chapter II)

What market conditions are leveraged ETF products for?

Leveraged ETF products have advantages in one-sided markets. There are more frictional expenses in two-sided markets. Lets take BTC3L as an example to observe the profitability of leveraged ETF products under different market conditions:*3xBTC refers to conventional 3-time leveraged BTC_USDT perpetual contract


l One-sided market: one way up

In the "one way up" scenario, leveraged ETF products perform better than conventional 3-time leveraged perpetual contracts (3xBTC). Below is how the profit is calculated:

On the first day, the price for one BTC rises from $200 to $210, the fluctuation rate is +5%. The NAV (net asset value) of BTC3L becomes $200(1+5%× 3)=$230;

On the second day, the price for one BTC rises from $210 to $220, the fluctuation rate is +4.76%. The NAV of BTC3L becomes $230× (1+4.76%× 3)=$262.84;

In conclusion, the fluctuation rate in these 2 days is ($262.84 - $200)/$200*100% = 31.4%, which is greater than 30%.


l One-sided market: one way down

In the "one way down" scenario, the loss incurred from trading leveraged ETF products is less than from contract trading. Below is how the loss is calculated:

The price of BTC falls by 5% on the first day. The NAV of BTC3L becomes: $200 (1-5%×3)=$170;

The price falls again on the second day and the fluctuation rate is -5.26%. The NAV of BTC3L becomes $170 (1-5.26%×3)=$143.17;

The overall fluctuation rate in these 2 days is ($143.17 - $200)/ $200*100%= -28.4%, which is greater than -30%.


l Two-sided market: first up, then down

If the price of BTC first rises, then falls back to the same level, then leveraged ETF products do not hold any advantages over perpetual contracts.

On the first day, the price for one BTC rises from $200 to $210, the fluctuation rate is +5%. The NAV of BTC3L becomes $200(1+5%× 3)=$230;

On the second day, the price falls from $210 back to $200, the fluctuation rate is -4.76%. The NAV of BTC3L becomes $230(1-4.76%× 3)=$197.16;

The overall fluctuation rate in these 2 days is ($197.16 - $200)/ $200*100%=-1.42%, which is less than 0%.


l Two-sided market: first down, then up

Same as the scenario described above, if the price first goes down, then goes up to exactly the same level, leveraged ETF products are not an ideal investment.

On the first day, the price of BTC falls by 5%. The NAV of BTC3L becomes $200 (1-5%×3)=$170;

On the second day, the price rises back from $190 to $200. The fluctuation rate is +5.26%. The NAV of BTC3L becomes $170 (1+5.26%× 3)=$196.83;

The overall fluctuation rate in these 2 days is ($196.83- $200)/ $200*100%=-1.59%, which is less than 0%.

Please be warned: Leveraged ETF products are financial derivatives with high risks. This article should only be considered a brief analysis instead of any investment advice. Users must have a thorough understanding of the products and their risks before trading.