ETFs allow investors to be a part of the crypto world yet stay unaffected by the risks of directly owning the cryptos. If you want to trade in crypto ETF on a bigger trading position yet apprehensive of your budget, you can always sign up for leveraged ETFs for crypto. If you know the basics of leverage trading you know that this particular trading strategy allows traders to trade on large positions with lent funds. The same applies for leveraged crypto ETF trading. Check out more at Multibank.io.
Technically speaking, leveraged crypto ETFs deploy financial derivatives as well as borrowed funds for scaling up returns of underlying cryptocurrency. The conventional ETFs are designed to track securities in the underlying index, particularly on a 1:1 basis. The crypto exchange leverage ETFs, on the other hand, tracks for 3:1 ratio or 2:1 ratio.
Leveraged crypto ETFs simplified
When it comes to crypto exchange leverage ETFs, investors can choose from 2x or 3x leverage, based on their specific trading goals. Having said that, it must be noted here that ambitious investors and traders generally opt for 3x crypto exchange leverage ETFs. Well, the 3x leverage does offer the window for higher profits but such a high level of leverage also poses certain risk factors.
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If you are a beginner in the zone, you should know that leveraged crypto ETFs are considered to be perpetual products. Put simply, there is no compulsion to settle crypto exchange leverage ETF trades within a particular date. Theoretically speaking, the price of crypto exchange leverage ETFs won’t really drop down to zero ever, thanks to rebalancing actions by fund managers. Thus, the liquidation risk is always minimal with leveraged crypto ETFs. As a leverage trader/investor, you will have the opportunity to trade crypto exchange leverage ETF products in the secondary market with no margin, that too any time you wish to.
The crypto exchange leverage ETFs are funds that are linked to the rate of return of underlying crypto assets. If the underlying cryptocurrency assets swing against leveraged ETF products beyond a particular parameter, then the fund managers would work to rebalance the composition of the fund to assure retention or maintenance of needed leverage. Based on this discussion, it can be stressed here that crypto exchange leverage ETFs trading is comparatively safer than leverage trading with actual cryptocurrencies. It’s because, in cryptocurrency leverage trading, you don’t have such extensive control mechanisms to prevent liquidation risks the way you find them in crypto exchange leverage ETFs trading.
Leveraged crypto ETF in both market phases
One of the best benefits of crypto exchange leverage ETFs trading is that the trading method enables traders to make trade and earn profit in both “high” and “dip” phases. Technically speaking, with crypto exchange leverage ETFs, you can trade in long as well as short positions. However, trading strategies or leverage strategies will be different in both phases.
Let’s say you want to make leverage trading on a BTC ETF. You will be able to purchase BTC3X (3X leverage) if you are confident that the price will witness an upward swing during your trading time. However, you can purchase BTC3R or BTCR if predictions are hinting towards a downward dip. If you face any kind of liquidation risk, you might exchange the ETF with USDT.
We will discuss the situation with two examples.
In the first example, say the BTC price is hovering around $9,000. Now, the majority of market prediction signals a further rise in BTC price. So, at the moment, the total value of crypto exchange leverage BTC3x is around 1. Now, you buy 1,000 BTC3x units with around 1000 USDT. Next day, you are delighted to find that the BTC price has rallied up to $9,990 (around 10% rise). In that case, the total value of the fund (BTC3x) would come to 1.3, courtesy the 3x leverage that you have opted for. This way, thanks to crypto exchange leverage, ETF trading will amplify your profit by 30%, enabling you to earn 300 USDT.
In the second example, we are heading towards a bearish market phase. The BTC price is the same as the one mentioned above- $9,000. Now, unlike the first example, this time, the prediction is hinting towards an upcoming market dip. If the BTC prices plummet, the total value of crypto exchange leverage BTCR would be around 1. In that case, you will buy 1,000 BTCR units with around 1000 USDT. So, the next day, if the BTC price dips down to, say, $8,100 (s10% drop), the BTCR net value would come to 1:1. It implies that the trader here would be able to make a decent 10% profit by earning around 100 USDT.
3X leverage could be risky
As mentioned above 3x leverage on crypto exchange leverage ETF carries certain risk factors as well.
The key perspective that you should understand here is the “cumulative” quotient. The major reason behind trading with leverage is that added funds will provide a cumulative boost to your actual trading capital so that you can trade in a large position. This way, the cumulative quotient might lead to added profit opportunities. On the other hand, the cumulative effect can also lead to higher losses than trading without leverage.
You should know that this compounding process in leverage trading reinvests the earning of an asset for additional returns- be it from interest or from capital gains. The traders here will calculate the compounding effect with the help of mathematical formulas; the method can result in either high gains or even losses in your leveraged crypto ETFs.
Does that mean that you will stay away from taking 3x leverage with crypto exchange leverage ETF? Well, certainly not- 3X leverage comes with stellar profit potential and you must opt for it- but with caution. To make things simpler, it’s wiser to opt for the 3x leverage if you have plans for short-term investing. But, please, do not opt for 3x leverage if you are aiming for long-term investment.
Make sure to study both TA and fundamental analysis of your chosen crypto exchange leverage ETF and its underlying crypto asset before making the trade.