Digital asset exchange Gate.io exceeded $420 million in daily trading volume in August 2021 for its leveraged ETFs offering, accounting for 53% of the total spot trading volume on Gate.io for the day.
After 15 years of use in traditional financial markets, leveraged ETFs have entered the cryptocurrency market. Investors leverage small investments to generate large returns, diversify the risks associated with crypto trading, offering significant advantages without trading margins. More and more investors are opting to trade using leveraged ETFs.
“Data shows that the highest single-day volume for leveraged ETF products traded on our platform in August 2021 exceeded $420 million. This is a new milestone for our platform and proof that by innovating and providing users with sought after features, platforms will flourish,” said Marie Tatibouet, Chief Marketing Officer at Gate.io
Since first being introduced on the cryptocurrency market in 2019, leveraged ETF offerings have become some of the most popular trading options offered by mainstream cryptocurrency exchanges. So, what exactly is a leveraged ETF and how has it become one of the most popular offerings on crypto exchanges?
Leveraged ETFs In A Nutshell
Exchange Traded Funds, or ETF for short, is a highly sought after investment method in the traditional finance sector. Through the use of leveraged investment tools such as stock index futures and swap contracts, the target index of funds can be tracked daily with a certain fixed leverage ratio, so if it moves in the right direction, investors will continue to receive an income in the same percentage ratio as their investment regardless of the price. In the summer of 2006, ProShare issued the first batch of leveraged ETFs based on the Nasdaq and S&P 500 in the US market.
Since then, leveraged ETFs have gradually become one of the most popular investment methods on the market. For example, the Nasdaq’s 3x leveraged product means that if the Nasdaq stock index rises by 1% in one day, theoretically the net value of the leveraged ETF offering would rise by 3% on that day, offering investors larger than normal returns. Additionally, there are reverse leveraged ETFs, also known as short ETFs, which are a multiple of the reverse of the daily tracked index. The Nasdaq -3x reverse product means that when the Nasdaq index drops by 1% on a given day, theoretically the net value of the ETF will rise by 3% on that day, meaning there’s opportunity in a bear market too.
The benefit of leveraged ETFs is that the leveraged products can be traded freely at any given time. The biggest advantage of leveraged ETF products is that they can automatically open a wider percentage of returns without having to pay for margins. Under the right market conditions, with accurate predictions, investors can benefit from higher than usual returns by making use of leveraged ETFs. Investors can avoid paying the costs associated with margins, spreading their trades over a longer period of time and using interest to cover the costs over time without facing liquidation.
Introducing Crypto Leveraged ETFs
At the end of 2019, the first cryptocurrency leveraged ETF was launched. Leveraged ETFs were officially introduced on the cryptocurrency market, and leveraged ETFs were integrated onto crypto exchanges with corresponding products on offer. The main difference between a cryptocurrency leveraged ETF and a traditional leveraged ETF is reflected in the investment tools offered. The cryptocurrency leveraged ETF replaces traditional leveraged investment tools such as stock index futures and swap contracts with the corresponding spot offerings in crypto perpetual contracts.
In terms of investment objectives and strategies, as well as operating mechanisms, cryptocurrency leveraged ETFs inherited all the advantages of traditional leveraged ETFs while offering more flexible leverage trading. It is generally described by the currency x multiple x long and short direction. For example, BTC3L represents a 3 times bullish token for Bitcoin, and BTC3S represents a 3 times bearish token for Bitcoin. If BTC rises by 1% on the same day, the net value of BTC3L will increase by 3%, while the net value of BTC3S decreases by 3%. If BTC drops 1% on the day, if the net value of BTC3L decreases by 3%, and the net value of BTC3S will increase by 3%. Based on market demand, various exchanges have started to offer ETF products of varying multiples such as 5 times leveraged ETFs and 2 times leveraged ETFs.
Due to the existence of the daily position adjustment mechanism, leveraged ETFs have obvious advantages in a unilateral market that continues to rise or fall. Floating profit adding positions can achieve the effect of compound interest, allowing investors to obtain more returns; However, in the volatile market, leveraged ETFs have no advantage.
If an investor buys $100 worth of a BTC3L or 3S product, their holdings will be worth less than $100 after a rise and fall. Short-term fluctuations may cause long term, permanent losses. On the other hand, in a unilateral market, if investors make a mistake in their judgment of the market, leveraged ETFs can also automatically cut some of their positions and stop losses in time to reduce the loss of investors. Therefore, leveraged ETFs are often used as risk hedging tools to reduce transaction risks.
The high risk and volatility associated with investing in the crypto market has always been an important factor hindering the progress and growth of cryptocurrencies. As exchanges expand and innovate to offer interesting new features and opportunities for investors, leveraged ETFs have become a hot topic in the industry. With lower barriers for investment, fewer risks associated with the products and higher returns for investors it’s no surprise that leveraged ETFs have become some of the most popular trading products on offer from most major crypto exchanges.
Gate.io is a leading digital currency exchange with over 6 million users in 190 countries across the globe. The exchange offers spot, margin, futures and contract trading in addition to DeFi products through HipoDeFi, custodial services through Wallet.io, investments through Gate Labs and it’s dedicated GateChain platform. The company also offers a wholly integrated suite of products such as its Startup IEO platform, NFT Magic Box marketplace, crypto loans and more.
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