Price Mechanism of KuCoin Leveraged Tokens
KuCoin Leveraged Token is indeed a unit share of a leveraged fund. The fund manager will ensure that the fund return is based on a specific multiple of the underlying asset that traders can gain by trading leveraged token shares. When the price volatility in the opposite side exceeds the threshold, the system will introduce the rebalancing mechanism to hedge the risks, making sure that the net loss is under control. KuCoin will always release the real-time net value of the fund to ensure transparency throughout the whole process.
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.
But usually, when there is a price premium, there would rise the opportunities for arbitrage in the secondary market, investors can therefore lower the premium to ensure that the transaction price of their invested leveraged token closely follows the fair price. Generally, it is suggested that traders of leveraged tokens to make sure their order prices do not deviate much from the net value, otherwise, there will be great losses.
To improve the sensitivity of price changes and optimize the trading experience, when the net value of a leveraged token is lower than a certain threshold, KuCoin will merge the shares of the product. After merging, the net value will be up 10 times but the quantity will become 1/10, the total assets of the investor will not be affected.
Supplementary to Net Value
- Cycle: Take the rebalancing time as the dividing point, a cycle is from the previous rebalancing time to the current one. The rebalancing time is divided into two categories, one is regular rebalancing that takes place every day at 23:30 – 23：45 (UTC). The other is irregular rebalancing that takes place when the intraday change of the underlying asset exceeds the preset threshold.
- Management Fees: Management fees are charged every day at 23:45 (UTC) according to the fold of leverage. The fee will be incorporated into the net value of the leveraged tokens.