Everybody talks about how the blockchain and cryptocurrency markets offer financial instruments that are new to traders and investors, especially in the space of decentralized finance, or DeFi in short. However, there are also interesting takes on tried-and-true models that are known to most professionals. One such addition comes in the form of leveraged ETF tokens.
These tokens are an adaptation of the Exchange-Traded Funds that are popular in traditional finance. Originally, ETFs consist of an asset that tracks the price of an underlying asset as a way to gain exposure without actually owning it. They are usually used to buy a basket of assets to keep track of an index or a whole industry sector.
For example, one of the most popular ETFs is the S&P 500, which keeps track of the A505 largest companies in the U.S. by market capitalization. It's used by investors as an efficient way to gain exposure to the U.S. market as a whole.
The Effects of Leverage
In the context of cryptocurrency trading platforms such as Wisebitcoin’s spot market, ETFs can be used as a tool to gain exposure to specific crypto assets without owning them. More so, they can be used in a leveraged way. This means that ETF tokens bought on the exchange won’t just track the underlying asset, they will amplify the earnings or losses on it.
While a traditional ETF tracks its underlying contract’s security on a one-to-one basis, a leveraged ETF token can aim for a 3:1 ratio. Here, the amount of gain is dependent on the amount of leverage. Consider an investment into a stock at the S&P through a leveraged ETF. This instrument uses borrowed funds to turn a gain of 1% into 3%. When using leveraged ETF tokens, the same principle applies. A 10% increase in the price of Bitcoin could mean a 30% earning for the token holder.
Another option is the usage of a leveraged inverse ETF that can be used for short selling. In other words, when the market turns bearish, a leveraged inverse ETF can take advantage of the fall of its underlying asset.
Pros and Cons
The nature of leveraged ETFs is of high-risk and high cost, yet high returns. For these reasons, leveraged ETF tokens have become a simple and popular way for professional traders to gain on short-term price movements in the cryptocurrency markets. They typically take advantage of its underlying asset's short-term momentum to profit, sitting on leveraged ETFs for only a day or two.
Pros of Leveraged ETFs
· Significant gains can be expected
· Allows a wide variety of indexes to be traded upon
· Inverse leveraged ETFs can be used to profit off a declining market
Cons of Leveraged ETFs
· Significant losses can also be expected
· Fees involved in investing in a leveraged ETF can be high
· Not used as long-term investments
A leveraged ETF token can be a simple yet powerful alternative investment vehicle when compared to traditional investments. The best way to get a feel for these financial instruments is by using the platform and tools available on Wisebitcoin for trading leveraged ETF tokens.
As a cryptocurrency exchange cloud service focused on offering professional traders the best options, Wisebitcoin offers ETFs tokens with 3X leverage for short and long positions. These include all the most popular assets in the cryptocurrency markets, such as BTC, ETH, LTC, UNI, and DOT.