Rebalancing Mechanism of KuCoin Leveraged Tokens
KuCoin Leveraged Token introduces a rebalancing mechanism. To ensure that the ratio of the combined leverage portfolio will not deviate much from the agreed one, the system will rebalance positions at 23:30:00 - 23:45:00 (UTC) every day (apart from exceptional circumstances).
When facing sharp fluctuations, if, compared with the last rebalancing, the change of the underlying asset exceeds the given threshold (initially set to 15% for 3 times long and short), KuCoin will rebalance the positions to control the risks.
The above rebalancing is carried out to hedge the losses of the side who lost money because of the fluctuations. If the BTC price increases by 15%, KuCoin will only rebalance the positions with -3x leveraged tokens. In this way, the investors will bear smaller losses if the market trend continues after the trigger of the irregular rebalancing; but please note that if the market trend reverses immediately after the rebalancing, the rebounce of the positions will be slowed down due to the rebalancing.
To summarize, if the leveraged tokens earn profits at the day, the profits will be compounded for investment. If there are losses, then part of the positions will be sold for the restoration of 3x leverage, aiming to avoid the liquidation.
Suppose an investor traded BTC3L:
- If the daily change of BTC price in four consecutive days is +10%, +10%, +10%, +10% respectively, then the return rate of BTC3L will be 185% (1.3×1.3×1.3×1.3＝2.856), 3 times higher than that of BTC in the spot market, which is 44%;
- If the change is -10%, -10%, -10%, -10% respectively, then the return rate will be -76%, 3 times lower than that of BTC in the spot market, which is -35%;
- If the change is +10%, -10%, +10%, -10% respectively, then the return rate will be -17%, 3 times lower than that of BTC in the spot market, which is -2%.
To summarize, when a cycle ends, it is hard to keep the accumulated return rate of the leveraged tokens and that of the spot market at an unchanged rate. Usually, the performance of leveraged tokens will overtake the claimed leverage, namely the increase of KuCoin Leveraged Token product in the same direction will be 3 times higher than the return rate of the underlying asset, and the decrease of KuCoin Leveraged Token in the opposite direction will be 3 times less than the return rate of the underlying asset. However, when facing fluctuations, the performance of the leveraged tokens will be inferior than the claimed leverage.