Beginners' Guide to KuCoin Leveraged Tokens
What are KuCoin Leveraged Tokens?
KuCoin Leveraged Tokens are tokens with the feature of leverage, you can find corresponding coins/tokens for all leveraged tokens.
E.g.: BTC3L stands for 3x leverage long for BTC, while BTC3S stands for 3x leverage short for BTC.
What are the Advantages of KuCoin Leveraged Tokens?
1.No liquidation
Although leveraged tokens are featured with leverage, they are still the spot trading type. Therefore, no matter how the price of the corresponding coin/token changes, there will never be a liquidation.
2.No requirement on margin or loans
Investors trading KuCoin Leveraged Tokens do not need to pay margin or borrow funds to try margin trade for more profits!
A dynamic rebalancing mechanism is designed for KuCoin Leveraged Tokens (click here for more details), which helps control risks and magnifies profits!
If investors go 3x long BTC in the margin market, when the BTC price decreases by 33%, they will face liquidations and lose all their funds. However, with the dynamic rebalancing mechanism, that tragedy will not happen. Even more, if the BTC price climbs up afterwards, the price of BTC3L will also increase, so there is still an opportunity to turn the negative profits into positive! Thanks to the mechanism, the system will automatically incorporate the profits into the original sum of investment and keeps the leverage at a fixed multiple to ensure the profit is compounded.
3.Convenient operations
Buying KuCoin Leveraged Tokens bears exactly the same way as trading in the spot market. Investors shall only buy or sell those tokens in the secondary market (or subscribe or redeem in the primary market, however, it is not recommended for new users).
How to profit from KuCoin Leveraged Tokens?
Investors need to judge the trend of the market. Buy when bullish and sell when bearish.
For example:
If you are optimistic towards BTC, then buy BTC3L. When BTC price rises by 1%, BTC3L also rises by 3%;
On the contrary, if you are pessimistic about BTC, then buy BTC3S. When BTC price drops by 1%, BTC3S also rises by 3%.
What fees will KuCoin Leveraged Tokens generate?
1. Trading Fees: The fee schedule is the same as that of the spot trade. For more information, please check https://www.kucoin.com/vip/level?lang=en_US.
2. Subscription Fees: Subscription fees are charged when users subscribe to tokens. Currently, the fee rate is 0.1% per subscription.
3. Redemption Fees: Redemption fees are charged when users redeem tokens. Currently, the fee rate is 0.1% per redemption.
4. Management Fees: Management fees are charged at the rate of 0.045% by 23:45 (UTC) every day. The fee will be incorporated into the net asset value of the Leveraged Tokens.
What is the difference between leveraged tokens and margin trading?
1. Margin trading leverages the borrowing of funds to its margin amount to enlarge the profits or losses, the leverage is based on the amount of crypto that one holds. However, the leveraged tokens seek to magnify profits by amplifying the rise and fall of the underlying asset, and the leverage is reflected in the price changes.
2. Leveraged tokens products do not require margin or crypto borrowing, and there is no risk of liquidation.
What is the difference between leveraged tokens and futures trading?
1. No liquidation risks: The leveraged tokens require no margin and are without the risk of liquidation.
2. Fixed leverage: The actual leverage in the perpetual contract will change with the fluctuation of the position value. However, the leveraged tokens are rebalanced regularly every day, the leverage is fixed at a certain rate.
When will rebalancing take place?
Normally, positions are rebalanced at 23:30:00 - 23:45:00 (UTC）every day to ensure that the ratio of the leverage portfolio does not deviate too much from the agreed one.
Why do leveraged tokens need the rebalancing mechanism?
The rebalancing mechanism aims to adjust the position of the contract of the leveraged tokens, therefore to maintain the leverage rate.
E.g.: If user A buys BTC3L with $100, it can be seen that a long BTC position with 3x leverage (the underlying value is $300) has been opened. The next day, if the BTC price falls by 1%, then BTC3L will fall by 3%, user A then loses $3 (the underlying value is $297). Now the leverage rate is 3.06 (=297/97). In order to maintain the leverage rate at around 3, there then arises the need to adjust positions every day for the rebalancing of the underlying assets.
However, 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 positions to control the risks.
Note: When under market volatility, there will be loss of net value due to the rebalancing mechanism.
E.g.: User A bought BTC3L with $100. When the price of BTC rises by 15% on the same day (current price at $115), an irregular rebalancing will be triggered. If the BTC price drops by 15% afterwards, the rebalancing will be triggered again. After the last two rebalancings, the final net value became $97.75. Compared to the original $100, there is a net loss of $2.25.
What is net value?
Theoretically, the net value of the leveraged fund is the fair price of leveraged token shares in the secondary market. However, due to market fluctuations, the transaction price in the secondary market may deviate from the fair price (that is, the net value of the fund) at certain times, resulting in a price premium.
What kind of investors are suitable for leveraged tokens products?
As a product that has been polished in the traditional financial market, this leveraged token product can satisfy the appetites of most investors. However, this product is particularly tailored for investors who believe that there will be volatility in the prices of the underlying assets, or those who do not want to bear the risk of liquidation. Due to the management fees and the feature of leveraged token products, investors may suffer losses when facing market volatility.
Example 1:
Take BTC3L as an example:
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%.
Example 2:
If the daily change of BTC price in 100 consecutive days is +10%, -10%, +10%, -10%... respectively, then the return rate of BTC3L and BTC3S will be -99.1%, there’s risk that the net value will trend to zero.
Example 3:
If BTC continues to rise in the first 10 days with a total increase of 200%, and then immediately falls for 10 days in a row with a total decline of 200%, then the net value of BTC3L and BTC3S may be at the risk of tending to zero. To ensure certain volatility, the share-merging mechanism will be triggered.
Besides, under other extreme fluctuations like continuous skyrocketing or plummeting, there will also be a risk that the net value of BTC3L and BTC3S tends to zero.