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2020 is coming to an end. If you want to take stock of the cryptocurrency industry this year, the overall feeling is like a roller coaster: On March 12, “Black Thursday”, the price of Bitcoin once fell below the range of $3,000. Was shrouded by clouds; then, the entire industry showed a “V-shaped” recovery trend, the market rebounded, institutional investors entered the market, and the price of cryptocurrencies led by Bitcoin began to rebound; and the current Bitcoin price hit a record high, and It is trying to break through the $25,000 resistance level. Judging from the current market fundamentals, the door to the second wave of cryptocurrency bull market has been opened, so are retail investors ready to continue investing in cryptocurrencies?
In fact, there are many investment options for users in the crypto community today. In addition to buying cryptocurrencies directly on exchanges, investors can also pledge tokens in the DeFi protocol for income farming; or buy shares in cryptocurrency trust funds. , You can even explore cryptocurrency derivatives such as futures/options/ETF. However, these investment channels are more or less risky and may not be suitable for all investors. For example, pledging DeFi tokens for income farming often cannot withstand the impact of market turmoil and is also vulnerable to hacker attacks; another example is the high threshold for purchasing currency trust funds, which must be purchased by qualified investors, and these cryptocurrency trust funds The premium is more serious; and the trading of derivatives has the problems of excessive leverage and complicated operations, which can easily put the funds of retail investors on the verge of liquidation.
After reading this, you may have a little doubt. In the current Bitcoin bull market environment, can it be possible to force leveraged ETFs? I believe everyone is familiar with traditional EFTs, which basically just passively track the target index to obtain the same return as the target index. Therefore, the income model of investing in such products is simple: when the index rises, the value of the ETF rises, and when the index falls, the value of the ETF falls. The leveraged ETF is actually an innovation to the traditional ETF, and it is also a relatively mature and common investment product. In contrast, leveraged ETFs can achieve daily tracking target index returns at a certain positive multiple. At present, 1.5 times, 2 times or even 3 times are common in the market, which is a kind of amplification of the rise and fall of the underlying index. From the perspective of the income model, leveraged ETFs are actually very suitable for use when there is a unilateral market in the broader market, because it can easily amplify investment returns, and these products are more suitable for retail investors among investors.
Advantages of Bitcoin leveraged ETF
First of all, the operating principle of the Bitcoin leveraged ETF is simple. It uses physical Bitcoin as the target, and only tracks the increase of Bitcoin to achieve a certain multiple of daily tracking of Bitcoin income (such as 2 times, 3 times or -1 times, -2 times) . If users want to earn more in the bull market, they can choose Bitcoin leveraged ETF bullish products on the exchange. If the current market is a bear market, users can choose leveraged ETF bearish products.
Secondly, Bitcoin leveraged ETFs can get more income and do not require margin and borrowing. Users only need to see the price and net value and can directly trade. The operation is as easy as Bitcoin spot trading.
Third, the Bitcoin leveraged ETF introduces two mechanisms of regular rebalancing and irregular rebalancing to control risks, so as to ensure that the combined leverage ratio and the agreed ratio will not deviate too much, and that investors will not liquidate their positions. If investors are not sure about the Bitcoin price and market trends and buy bullish products, but the unilateral market that was originally rising suddenly reverses, and the price of Bitcoin drops for a short time and continues to fall in the later period, investors do not have to worry about losing money. Light. This is because under the timing rebalancing mechanism, as the price of the underlying asset changes, the position at the beginning of each cycle must be adjusted, so as to ensure that the return rate is anchored to a certain multiple of the underlying asset return rate. The timing rebalancing position adjustment is mainly based on the appropriate adjustment of the position at the beginning of each cycle, so that the risk exposure of this cycle can be anchored to a multiple of the risk exposure of the corresponding underlying asset.
Under the irregular rebalance mechanism, when the market fluctuates drastically, as long as the fluctuation of the underlying asset compared with the previous rebalance point exceeds a given threshold, the leveraged ETF will rebalance the position. At this time, if the irregular rebalance is triggered After the market trend continues, the user loss will be reduced, which can effectively avoid liquidation; if the market trend starts to rebound after the unscheduled rebalancing is triggered, although the user’s profit may be reduced due to the lightening of the position caused by the rebalancing intervention, this The situation does not affect the overall benefits of users. To put it simply, even if there is a huge instantaneous reverse shock in the market, leveraged ETF investors do not need to worry about the risk of liquidation. As long as the investment target (such as Bitcoin) is developed, the income will be controllable.
Finally, some leveraged ETF products also introduce a compound interest model, that is, position earnings will be automatically transferred to the principal. If the leveraged ETF purchased by the user generates a floating profit, then the next time the balance is rebalanced, the floating profit will make the leveraged ETF position Increase, that is, positions that are newly added multiples of floating profit. Under unilateral market conditions, this model will make investors’ income further increase.
The risks of Bitcoin leveraged ETFs
Although leveraged ETFs greatly reduce the risk of liquidation liquidation, in other extreme or large-scale bilateral market fluctuations, such as continuous skyrocketing and continuous plummeting, the net value of the product may also tend to zero and liquidation risks. Moreover, certain capital wear costs may also be incurred when the market is less volatile or volatile.
In general, it is almost a foregone conclusion that Bitcoin and the broader cryptocurrency market have entered a unilateral bull market. In this market context, more and more investors have begun to try leveraged ETFs. And because the cryptocurrency leveraged ETF is still in the early stage of development, its market development space is huge, and it has the potential to become a “new outlet” in the digital asset cycle. However, it is worth noting that no matter how advantageous the leveraged ETF, an innovative financial derivative, is, the risk of volatility in the cryptocurrency market naturally exists, so investors still need to be cautious.
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