What is a Leveraged ETF on MEXC? Learn and guide trading

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2021-12-21 21:28:24

What is a Leveraged ETF?

The MEXC Leveraged ETF is a product that trades at certain multiples (such as 3x) of the target daily return on the asset through a fixed leverage basis.

In simple terms, if the underlying price increases by 10%, the net value of the 3-times leveraged ETF product will increase or decrease by 30%.

Example: If you predict the Bitcoin price will increase in the near future and you buy 100 USD BTC3L (BTC 3x Long). After that, BTC increases by 10%, your profit will be 30% (because of x3 leverage), your investment will now be 130 USD. If BTC drops 10%, you will lose 30 USD and your investment is only 70 USD.

Symbol (for example Bitcoin)

  • BTC3L: BTC 3x Long
  • BTC3S: BTC 3x Short

Coin price

As you can see, the coin price on the ETF is not the same as the spot price. ETF coin prices are essentially constants that the MEXC exchange system has calculated based on the base price of each coin.

There are more than 80 underlying coins with integrated leveraged ETFs with leverage ranging from x2 to x5, depending on the coin.

Difference between Leveraged ETF and Margin Futures

In fact, leveraged ETFs are not much different from margin futures. However, leveraged ETF products have the following unique features:

  • No deposit required, account transfer, lending, debt repayment
  • Low risk of liquidation
  • Buying/selling an ETF is as easy as buying/selling a spot. For example, if you want to buy BTC3L, just look at the price and net worth => enter the purchase amount => choose to buy BTC3L without any other action.
  • Fixed leverage (leverage of ETF products is essentially constant).

Special Features of ETFs on MEXC

No deposit fee

Investors can buy/sell on the secondary market without paying any deposit

Compounding Effect

Leveraged ETF will automatically convert position profits to principal. If the purchased leveraged ETF generates floating profit*, floating returns will increase a leveraged ETF position on the next rebalancing, creating a compound interest pattern.

*Floating profit is not fixed, changes continuously, fluctuates according to market situation

Example: After you buy 100 USD BTC3L and get 30% profit (equivalent to 30 USD) on the first day. After 23 hours (the time of the periodic rebalancing every day), the exchange will add a profit of 30 USD to the principal. That means on the second day, your principal will be 130 USD.

If Bitcoin goes up 10% again on Monday, your $130 investment will increase by 30% and be worth $169. So after 2 days, Bitcoin price only increased by 20% but thanks to leveraged ETF and compounding effect, your investment increased by 69%.

But in the event that Bitcoin drops 10% on Monday, your $130 principal will lose 30% of its value and become only $91.

Eliminate risk of liquidation

For example, if you buy BTC3L and then BTC drops 33%. Instead of your long position being liquidated, with a leveraged ETF that won’t happen.

Leveraged ETFs will decrease according to market conditions and adjust positions through a rebalancing mechanism to prevent positions from being liquidated. Even if BTC price drops 33%, your position will still live.

CHK will explain more in the section “Why lose tokens when trading ETFs”

Mechanism of ETF

Periodic rebalancing

MEXC will rebalance positions every 24 hours, at 23:00 (Vietnam time) every day.

Rebalancing according to price movements

In order to protect the interests of investors and avoid the fund’s net worth and token price plummeting, the fund has established an unusual rebalancing mechanism due to price fluctuations.

The function of this mechanism is to ensure that the net worth of the fund and the value of the tokens will not return to zero, and that the losses of investors who choose the wrong direction can be controlled within a certain range.

The figure above shows the rebalancing metric to the price movements of all assets. For example, if Bitcoin is up 30% (3rd row), then BTC3L will increase 300%. Meanwhile, the price volatility rebalancing mechanism will be applied to BTC3S. Instead of 300% drop, BTC3S will only drop 66.52%

Merge Mechanism

When the price of the net worth is below a certain threshold, the platform will conduct a token consolidation. At this time, the price of the net worth will be 10 times the amount before the merge, but the corresponding number of tokens will also be reduced to 1/10 of the amount before the merge.

User’s total assets will not be affected. The consolidation is intended to improve the sensitivity of price changes and optimize the trading experience.

CHK will explain more in the section “Why lose tokens when trading ETFs”

Transaction fee

  • Transaction fee: 0.2%.
  • Management fee: Charged at 23:00 every day in Vietnam time (if you do not place an order at that time, this fee will not be incurred). Fees will range from 0.25% to 0.3%, depending on the asset pair.

Why lose tokens when trading ETFs?

If you do not understand the trading principles in ETFs, it is possible that after a while of trading, you will realize your tokens have been lost for unknown reasons. In fact, this is already covered in the section “Mechanism of consolidation”.

Specifically, when the price of a coin falls below a certain level (specifically, the level of 0.1 USD), this consolidation mechanism will take place. CHK gives the following example for your clarity:

On 7/15 you buy 100 USD DOT5L at 0.12 USD and get 1000 DOT5L.

By July 17, the price of DOT increased, but had a beard pulling below $0.045.

Right now, your DOT tokens will be accumulated to 100 DOT5L (1/10 of the original coins), while the price of DOT5L increases to 0.5 USD (10 times from the price of 0.05 USD – a certain level set by the exchange. , which corresponds to the definition “the price of the net worth will be 10 times as much before the consolidation.” Read again the “consolidation mechanism”)

So after the merge, the price of DOT5L will be 0.5 USD and the amount of DOT5L is 100 tokens. So your asset value does not change because buying at 0.12 USD but the price drops to 0.045 USD, you have lost 50% of the price regardless of coin consolidation or not.

And after pulling the beard to $0.045, the price rises again, your asset will also start to increase again.

So, thanks to the consolidation mechanism, when the price dropped to $0.045, your account was not burned, but could be profitable on the next price increase.

How to trade ETFs effectively?

To maximize profits in this type of trading, you need to know the following:

  • Leveraged ETFs are only beneficial for short-term trading
  • You must have a solid market analysis background, have the ability to highly accurately judge the short-term trend of the market.
  • Avoid management fees by buying/selling before 23:00 every day.
  • ETFs are not suitable for inexperienced and undisciplined traders due to the high volatility of the market.

Conclude

Hopefully with the above knowledge and examples, you can understand the leveraged ETF trading on MEXC with important notes. CHK wishes you successful trading and reaping profits.

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