As a new type of derivative in the cryptocurrency world, ETF products are gradually known by people. Similar to ETF products in traditional finance, ETF products have the characteristics of low transaction costs and convenient trading methods. However, the concepts and mechanics are relatively difficult for most investors to understand, so this article will take you to a detailed understanding of what ETF products are and what you need to know when trading ETF products.
What is ETF product
The ETF product is a derivative tracking the price movement of a given underlying asset, with an amplitude 2-5 times of the asset.
ETF products can be traded in the MEXC spot market. You can easily use leverage with ETF products and don’t need to worry about any liquidation risk. Each ETF product represents a basket of MEXC futures positions.
The name of the ETF product is represented by “currency + leverage multiple + long-short direction”.
For example, BTC3L represents a long position of BTC with 3 times leverage, L stands for Long. ETH5S represents a short position of Ethereum with 5 times leverage, S stands for Short.
Taking BTC3L as an example, if the BTC price rises by 1%, the net value of BTC3L will rise by 3%, and the corresponding BTC3S net value will fall by 3%.
Pros of ETF Products
No liquidation
Although ETF products have leverage properties, their essence is still the spot. Therefore, no matter how the price of the underlying asset changes, there will be no liquidation.
No margin and borrowing required
ETF products can be bought or sold like spot. You can easily use leverage with ETF products and don’t need to worry about any liquidation risk and margin.
Compound-interest effect and risk control
The rebalancing mechanism of ETF products makes it have compound interest, and after regular rebalancing, the profit part of the position will be automatically reput into the newly opened position. ETF products are suited for holding in the trending markets.
When the underlying asset fluctuates above a certain threshold, it will trigger an irregular rebalancing for the losing party. This will automatically sell a part of the position and restore to 3 times leverage to control the risk of the position.
However, with great market volatility, the rebalancing mechanism may also cause a certain degree of portfolio erosion. The graph below shows a case of the compound-interest effect of ETF products.
Pricing mechanism
ETF Products are essential to ensure that ETF holders enjoy a fixed target multiple of the daily return on the underlying asset by fixing the returns of the leveraged fund. Therefore, the value of the ETF product is the net value of its fund, which tracks the position of a basket of futures of the corresponding crypto.
The platform will announce the net value of the fund in time to maintain a high degree of transparency.
Theoretically, the net value of a fund is the fair-trading price of ETF products in the secondary market. However, due to fluctuations in the market, there may be a situation where the secondary market trading price deviates from the net value of the ETF in a certain period of time, resulting in a certain premium. Users should pay attention to their order price not deviate too much from the net value to avoid losses
Share Merging Mechanism
When the net value price is lower than 0.1 USDT, there will be a merger mechanism to change the net value price 10 times before the merger, but the corresponding amount will also become 1/10 before the merger, and the user’s total assets will not be affected in any way to improve the sensitivity of price changes and optimize the trading experience.
Closing thoughts
You can get more leverage than spot trading in ETF trading which in turn may be more profitable. At the same time, because of its unique mechanism, in a trending market, it is very likely to get excess profit returns. You may try trading ETF products to experience its unique advantages.
Disclaimer: Trading crypto involves significant risk and can result in the loss of your invested capital. The materials are not related to the provision of advice regarding investment, tax, legal, financial, accounting, consulting, or any other related services and are not recommendations to buy, sell, or hold any asset. MEXC Learn solely provides information, but not financial advice. You should ensure that you fully understand the risk involved before investing.
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