What is ETF?
ETF is a fund product that utilizes derivatives such as contracts to "replicate" the price performance of an underlying asset while amplifying its movements by a fixed multiple (e.g., 3x, 5x). These tokens add leverage to the underlying asset, allowing users to engage in leveraged trading without needing to pay margin or worry about liquidation risks—simply by buying and selling ETF like spot trading.
In other words, ETF magnifies the returns of standard digital assets. When the target asset moves by 1%, the net asset value (NAV) of the ETF changes by a multiple of that movement, such as 3% or 5%. If the leverage multiple is 1x, ETF functions similarly to traditional digital assets.
Unlike traditional ETFs, which track a basket of stocks or indices, ETF tracks and amplifies the price performance of a single digital currency.
ETF Symbol Convention
The symbol of ETF consists of three components: "Underlying Asset," "Target Leverage Multiple," and "Direction." For example:
- Underlying Asset : The underlying asset of the ETF is the cryptocurrency it tracks. For example, BTC3L and BTC3S both track BTC.
- Target Leverage Multiple : BTC3L and BTC3S have a leverage multiple of 3x, while BTC5L and BTC5S have a leverage multiple of 5x.
- Direction :
BTC3L: A 3x long BTC token (L = Long)
BTC3L is an ETF that holds a 3x leveraged long position in BTCUSDT perpetual contracts. Buying BTC3L means holding a 3x long position in BTC. If BTC's price rises by 1%, the NAV of BTC3L increases by 3%.
BTC3S: A 3x short BTC token (S = Short) BTC3S is an ETF that holds a 3x leveraged short position in BTCUSDT perpetual contracts. If BTCUSDT's price drops by 1%, the NAV of BTC3S increases by 3%.
How does ETF work
ETF is essentially funds managed and issued by professional financial teams, with an initial NAV of 1 USDT.
Each ETF corresponds to a specific number of futures contract positions. The fund manager dynamically adjusts these positions through perpetual contract markets to maintain the target leverage multiple (e.g., 3x or 5x).
ETF uses a rebalancing mechanism to dynamically adjust futures positions, ensuring that the fund's NAV maintains a fixed leverage multiple over time (daily), amplifying potential returns. The fund manager charges a daily management fee of 0.1% of the NAV to cover contract market fees, funding rates, and other operational costs.
How does the Rebalancing Mechanism work
Since underlying asset price fluctuations can cause actual leverage ratios to deviate from the target, the fund manager periodically rebalances the positions to restore the intended leverage multiple.
For simplicity, assume the current BTC price is 100 USDT , and the NAV of BTC3L is 1 USDT .
Scenario: A user purchases 100 USDT worth of BTC3L (3x ETF) Initial State:
- The fund manager uses 100 USDT as margin to open a 300 USDT long position in BTC perpetual contracts (3x leverage).
| BTC Price | BTC3L NAV | BTC 3x Futures Position | Actual BTC3L Leverage |
|---|---|---|---|
| 100 | 100 | 300 | 300/100 = 3x |
BTC Price Increases:
- If BTC price rises 5% , the futures position increases 15% (5% × 3x).
- BTC3L NAV rises 15% to 115 USDT .
| BTC Price | BTC3L NAV | BTC 3x Futures Position | Actual BTC3L Leverage |
|---|---|---|---|
| 105 | 115 | 315 | 315/115 = 2.74x (below target) |
- Since BTC3L’s target leverage is 3x , the fund manager adds 30 USDT to futures positions, bringing the total position value to 345 USDT (115 × 3x), restoring 3x leverage .
| BTC Price | BTC3L NAV | BTC 3x Futures Position | Actual BTC3L Leverage |
|---|---|---|---|
| 105 | 115 | 345 | 3x |
Similarly, if the underlying asset price drops, the fund manager reduces positions to maintain the leverage ratio.
Gate users do not need to manage futures positions directly; they simply buy and sell ETF on the spot market. When trading ETF, users are buying into the fund’s NAV, not the actual cryptocurrency itself.
For more details on the rebalancing mechanism, please refer to: Gate ETF Rebalancing Mechanism
Key Features of ETF
- ETF is perpetual products with no expiration or settlement date, allowing users to buy or sell anytime.
- Trading ETF is similar to spot trading—no margin or collateral is required, and there is no liquidation risk.
- The rebalancing mechanism makes ETF ideal for trending markets. In such conditions, compounding effects can enhance returns. However, in volatile markets, frequent rebalancing can lead to greater decay.
Risk Disclosure
- Leverage Risk
ETF amplifies both gains and losses: If the underlying asset drops 10% , a 3x ETF loses 30%, and a 5x ETF loses 50%.
- Volatility Decay – Not Suitable for Long-Term Holding
ETF suffer from volatility decay , meaning their NAV can decline even if the underlying asset returns to its original price.
Example:
If BTC rises 10% on day one and drops 10% on day two:
- 2D BTC final price: 99 USDT ( 1% total loss )
- 2D BTC3L NAV: Day 1: +30% → 130 USDT Day 2: -30% → 91 USDT
- Result: BTC dropped 1% , but BTC3L lost 9% .
Thus, ETF is only suitable for professional traders seeking short-term leveraged exposure or hedging purposes. It is not ideal for long-term holding due to the rebalancing mechanism, which causes increasing capital decay over time.
