Gate.io Blog The Rebalancing Mechanism of Leveraged Tokens

The Rebalancing Mechanism of Leveraged Tokens

22 March 11:44

Gate.io has introduced a rebalancing mechanism for leveraged tokens. The rebalancing mechanism aims to adjust the position of the contract of the leveraged tokens, to maintain the leverage rate. In order to ensure that the token is always at the leverage of the corresponding product, it is necessary to adjust the position every day, and re-adjust or rebalance the underlying assets to the corresponding ratio.

Leveraged tokens can reduce the risk of liquidation through the method of rebalancing. When facing sharp fluctuations, if, compared with the last rebalancing, the change of the underlying asset exceeds the given threshold, Gate.io will rebalance the positions to control the risks.

The above rebalancing is carried out to hedge the losses acquired because of the fluctuations. 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 rebound of the positions will be slowed down due to the rebalancing.

Rebalancing can boost the positive effects of compounding during trending periods, but it can also magnify the negative effects of compounding during volatile periods. In addition, because rebalancing involves reducing and increasing exposure regularly, it may also result in additional transaction costs.

The position adjustment mechanism (rebalancing) will not increase/decrease the number of position holdings. Position adjustments are made by Gate.io to the contract positions in order to maintain the leverage ratios. Position holdings of the traded currency do not change.

Every time a position is adjusted, the calculation base of the NAV will change. For example: When the positions are adjusted at 00:00, the NAV is $1, then the NAV of the previous rebalancing point is $1. The current NAV calculation formula is $1×{1+ price change of the underlying currency*targeted leverage ratio}.

Before the next position adjustment, the NAV is always based on $1 and changes with the fluctuations of the underlying currency.

If an irregular position adjustment is triggered when the NAV becomes $0.7, then after the adjustment, the NAV of the previous rebalancing point becomes $0.7, and the current NAV is calculated as $0.7×(1+ price change of the underlying currency* targeted leverage ratio).

When are position adjustments scheduled?

On Gate.io, we have irregular rebalancing and regular rebalancing mechanisms for different market situations.

For 3X leveraged ETF products:
1.Irregular rebalancing: When the real-time leverage ratio exceeds 3, irregular rebalancing will be triggered and the position adjustment mechanism will adjust the leverage ratio to 2.3.
2.Regular rebalancing: 00:00UTC+8 every day is the regular rebalancing time. When the real-time leverage ratio goes below 1.8 or above 3, or the fluctuation rate (calculated with contract index price) exceeds 1% (because of a significant increase or decrease in the underlying currency's price in the last 24 hours), the position adjustment mechanism will adjust the leverage ratio to 2.3.

For 5X leveraged ETF products:
1.Irregular rebalancing: When the real-time leverage ratio exceeds 7, irregular rebalancing will be triggered and the position adjustment mechanism will adjust the leverage ratio to 5.
2.Regular rebalancing: 00:00UTC+8 every day is the regular rebalancing time. When the real-time leverage ratio goes below 3.5 or above 7, or the fluctuation rate (calculated with contract index price) exceeds 1% (because of a significant increase or decrease in the underlying currency's price in the last 24 hours), the position adjustment mechanism will adjust the leverage ratio to 5.

All content above is not investment advice. Leveraged tokens are high-risk products. Leveraged tokens can be very rewarding for short-term trading but you need to be cautious when holding these tokens over a long period of time. Please make sure you have a good understanding of the risks involved, before trading leveraged tokens.

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The Rebalancing Mechanism of Leveraged Tokens

When are position adjustments scheduled?

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