Dear LBank users:
In order to make community users have a more comprehensive understanding of LBank leveraged ETF products, LBank has answered and sorted out the questions raised by users regarding leveraged ETF. If you have any questions, please feel free to ask, we will update the following contents irregularly.
Q1: What is a leveraged ETF?
A1: Leveraged ETF is a kind of financial derivative that is very popular in traditional financial markets. It is a trading product that tracks the increase/decrease amount of the underlying asset (such as BTC) with certain times (such as 2 times, 3 times, or -1 times, -2 times). If the BTC price increases by 1%, the corresponding 2x and 3x leveraged ETF products will increase by 2% and 3%; while the corresponding -1x and -2x products will fall by -1% and -2%.
Q2: How does the leveraged ETF product earn benefits?
A2: The leveraged ETF product is essentially a fund managed by a professional financial team. Each ETF product corresponds to a certain number of futures positions. The fund manager dynamically adjusts the futures positions to keep a fixed leverage for the product for a certain period of time. A professional team is responsible for the management and maintenance of the investment portfolio, allowing investors to easily build their own constant leveraged investment portfolio without needing to understand the specific mechanism.
Q3: What are the considerations for trading leveraged ETF product?
A3: Multiple leverage works both ways, helping both gains and losses. Having a three times gain also carries a three times risk. You should trade with a clear sense of direction. In addition, a management fee of 0.1% per day for each time of leverage will be settled at 00:00 per day. If the position is not held at this time, the fee will not be settled.
Q4: What is unit net value? What is the difference between unit net value and price?
A4: As a fund product, each unit of leveraged ETF product corresponds to the corresponding share of the fund. The dynamic actual value of this share is the unit net value of the leveraged ETF product. Since the product is actively trading in the secondary trading market, the latest transaction price may deviate from the unit's net value. We also list the unit's net value and the latest transaction price at the same time. We hope investors can realize that the price you buy / sell should not deviate from thenet value too much. If there is a large deviation between the net value and price, in theory you will suffer a corresponding loss.
Q5: What is the transaction rate of leveraged ETF products?
A5: The transaction fee for trading leveraged ETF products is 0.2%. At the same time, we will charge a daily management fee (usually the management fee rate is 0.1%, it may be adjusted based on the market performance) each leverage to pay the necessary fees such as the fund rate and transaction fee. The management fee will be reflected in the change in net worth and will only be charged at 00:00 HongKong time. If you do not hold the product at that point in time, no fees will be incurred.
Q6: What are the similarities and differences between leveraged ETF products and futures contract products and leveraged spot trading?
A6: Compared with leveraged spot trading, leveraged ETF products do not require margin, and there is no risk of being liquidated. At the same time, compared to leveraged spot trading funds, the holding rate of leveraged ETF products is lower.
Similar to futures contract products, leveraged ETF products are derivatives with leverage effects, which can amplify investors' returns and become a cheap risk hedging tool. However, compared to futures contracts, leveraged ETF products have the following unique characteristics:
- No margin required and no risk of liquidation (risk warning: if the direction is wrong, there will be a risk that the price will approach zero in extreme conditions). For investors who don't have much time to keep an eye on the market, buying leveraged ETF products can save a lot of time and energy.
- Fixed leverage times. For futures holders, as asset prices changing, the leverage of contract positions may change, which deviates from the original intention of investors. For example, investors have established a low leveraged short futures position. When asset prices rise sharply, the investor's position leverage ratio will become very high, which deviates from the investor's original risk appetite. The leveraged product leverage ratio is basically constant, which allows investors to better comply with their investment plans.
Q7: There's never forced liquidation, how does it realize?
A7: First of all, "no forced liquidation" is a comparative advantage of leveraged ETF products over contracts, which is also an original intention of its design. This advantage is due to a "rebalancing mechanism" designed by our fund management team.
A "rebalancing mechanism" periodically rebalances the portfolios behind leveraged ETF products so that the combined leverage ratio does not deviate too far from the agreed ratio.
We usually rebalance the investment portfolios behind the leveraged ETF in every 24 h, in order to avoid the enlargement of the gap between portfolio's leverage ratio and the agreed ratio. When there is a sharp fluctuation and the underlying asset’s fluctuation range exceeds a given threshold compared to the previous rebalance point (initially we set the threshold for 3x leverage short and long as 15%. In the future, if other leverages available, the threshold may be adjusted.), we will perform temporary rebalancing to control the risk of the investment portfolio. The rebalancing is only for the party that has lost money in the volatile market. For example, if the BTC rises by 15%, we will rebalance the BTC3S product, and will not adjust other products.
Risk warning: if the direction is wrong, there will be a risk that the price will approach zero in extreme conditions.
Q8: The naming rules of leveraged ETF products?
A8: BTC3L stands for 3x leverage long for BTC, while BTC3S stands for 3x leverage short for BTC.
Q9: How to calculate the rise and fall?
A9: Net value of Long products = net value at the last adjustment point * [1 + 3 * (the latest spot transaction price - the spot price at the last adjustment point) / the spot price at the last adjustment point * 100%];
Net value of Short products = net value at the last adjustment point * [1 - 3 * (the latest spot transaction price - the spot price at the last adjustment point) / the spot price at the last adjustment point * 100%];
Please check the picture below.
Q10: What is net value? Should I pay attention to it when trading? Must sell after buying to obtain profit?
A10: Net value can be understood as the real value of ETF products. You should always pay attention to the net value, to ensure that the deviation between transaction prices and net value is not too large.
You have to sell after you buy to make a profit. Holding and not to sell may cause floating profit or loss. But because of the "wear and tear" nature of leveraged ETF products (that is, the daily management fee charged for holding a position), holding them for a long time may suffer wear and tear.
Q11: Is the management fee deducted from the account every day?
A11: The management fee of the leveraged ETF will not be deducted from account. The management fee will be reflected in the net value change, which will be presented in the form of "deducting the value of the corresponding leveraged ETF". (namely "overnight fee")
Q12: Where do the returns on buying leveraged ETF come from?
Q12: The essence of the return on buying leveraged ETF is the buyer's correct judgment on the direction. Fund managers are responsible for strictly hedging risk to ensure that the fund follows the rules.
Q13: How is the opening price of 1 USDT set? What is the price based on? How does it run compare to the current price of BTC?
A13: 1 USDT is a standardized initial opening price for calculating future returns. The actual price is based on the average spot price on each major platform. Compared with the current price of BTC, we have a set of relatively abstract net value calculation formula, which is listed in the announcement of Guide for leveraged ETF (Details): https://lbankinfo.zendesk.com/hc/en-gb/articles/900000185263
Q14: How do the returns from holding leveraged ETF perform?
A14: Take the BTC 3L as an example to see how the profits shows. If the daily trend of BTC is +10%, +10%, +10%, +10%, then the 4-day return of the product is 185%, which is three times higher than the 4-day spot return of 44%. If the daily trend of BTC is -10%, -10%, -10%, -10%, then the 4-day loss of the product is 76%, which is three times less than the 4-day spot loss of 35%.
If the daily trend of BTC is +10%, -10%, +10%, -10%, then the 4-day yield of the product is -17%, which is three times less than the 4-day spot yield of -2%. If this trend lasts for 100 days, then the yield of BTC 3L and BTC 3S products will be -99.1% which means there is a risk that the net price will tend to zero.
Risk Warning: When trading leveraged ETF products, please pay attention to the deviation between the actual net value of the product and the latest transaction price before placing an order. If the direction judgment is wrong, there will be a risk that the price will approach to zero under extreme market conditions. This product is a derivative with great risks, please pay attention to risks control.
More Details about trading leveraged ETF please click Guide for Leveraged ETF.
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