FTX Leveraged tokens provide simplified leveraged exposure to crypto assets so you don’t have to worry about collateral, margin, liquidation prices, or anything else that you need to manage when margin trading. While these tokens can be traded, held, or transferred just like any other asset, their prices move differently than your standard asset.
Each leveraged token has a net asset value (NAV) and an underlying position. Let’s take ETHBULL (3x long ETH) as an example. If ETHBULL has a NAV of $200, it would have an underlying position of $600. That means that when ETH goes up 1%, ETHBULL goes up 3%; and when ETH goes down 1%, ETHBULL goes down 3%. There are +3x (BULL) and -3x (BEAR) LTs.
When markets move, the leverage of each leveraged token changes and the tokens need to rebalance in order to return to their target leverage. Let’s continue with the ETHBULL example. If ETH increases by 5% in 24 hours, the profit for the underlying position would be $30 (the original NAV of ETHBULL: $600 * the ETH price change: 5% = $30). ETHBULL’s NAV would then be $230 and the leverage would be ~+2.74x ($600 * 105% / $230 = ~ 2.74x), rather than the target +3 leverage.
To ensure each leveraged token returns to 3X leverage for the second day, FTX will rebalance the tokens at 00:02 UTC each day. In this example, FTX will need to increase the underlying position of ETHBULL. In order to return to 3X leverage, the underlying position in ETH should be $690 (3 * NAV). So ETHBULL will buy the additional $60 of ETH. Increasing the underlying position does not affect the NAV or price of the leveraged token. The tokens rebalance in order to keep the actual leverage in line with the targeted leverage. If the daily movement of the leveraged token causes the leverage to be 33% higher than its target, there will also be an intraday rebalance.
Since leveraged tokens rebalance at 00:02 UTC each day, within a day starting at 00:02 UTC, the price movement of the leveraged token should mimic their target leverage times the underlying asset’s move. However, a 5% move over two days is not the same as a 10% move overall, meaning that over longer periods of time, the rebalances mean each leveraged token’s movement is not necessarily the target leverage times the movement of the underlying. Typically, leveraged tokens overperform during periods of momentum and underperform during periods of mean reversion.
Is the NAV of a leveraged token equivalent to its price?
No, the NAV and price are not always the same. The supply and demand dynamic on secondary markets contributes to small fluctuations of the leveraged token price. The price will tend to converge to the NAV, however, because liquidity providers can create and sell leveraged tokens if they’re trading too high, or buy and redeem leveraged tokens if they’re trading too low.
Can leveraged tokens get liquidated?
Since leveraged tokens are assets for spot trading, there are no liquidations on the tokens. Price movement does not change the number of tokens you hold. However, the NAV of each token does change with price movements. When the daily movement of a leveraged token causes the leverage to be 33% higher than its target, the token will rebalance mid-day to limit losses and attempt to avoid getting close to liquidation. In an extreme scenario where markets have a gap movement of near 33%, the price of a leveraged token could approach $0 if it can’t conduct its intraday rebalance in time.
How does the price of a leveraged token change over multiple days? Will the NAV of leveraged token still be 3X the performance of the underlying position?
No, it may not. In the below cases, leveraged tokens do well--or at least better than a margin position that starts out at the same size--when markets have momentum. However, they typically perform worse than a margin position when markets mean-revert.
Here are examples of ETH-PERP prices in different market scenarios and how that would impact ETHBULL’s price, NAV, and leverage.
- One-Sided Market: Increase & Increase
When ETH-PERP is up over two consecutive days, we’ll typically see that ETHBULL outperforms 3X ETH-PERP.
On Day 1, ETH increases from $200 to $210. According to the previous answer, it is understood that ETHBULL will increase its ETH-PERP underlying position to 3X leverage. In other words, after rebalancing, ETHBULL will have a $690 ETH-PERP underlying position.
On Day 2, ETH increases by 4.76% from $210 to $220. As a result, the underlying position of ETHBULL changes to $722.86 ($690*104.76%), while the NAV changes to $262.86 ($722.86-2*$230). Therefore after 2 days of increase, ETHBULL is up 31.4% ($262.86/$200-1), which is greater than 30%.
- One-Sided Market: Decrease & Decrease
Similarly, when the market is down over two consecutive days, ETHBULL has a higher leveraged multiple than its targeted 3X. After rebalancing, the underlying position is $200*(1-5%*3)=$170, $170*3=$510.
On Day 2, ETH decreases by -5.26% from $190 to $180. As a result, the underlying position changes to $483.16 ($510*94.74%), while the NAV changes to $143.16 ($483.16-2*$170). Therefore after 2 days of decrease, ETHBULL is down -28.4% ($143.16/$200-1), which is greater than -30%.
- Sideways Drift: Increase then Decrease
On Day 1, ETH increases from $200 to $210. After rebalancing, the underlying position of ETHBULL will be $690 ETH-PERP.
On Day 2, ETH decreases by -4.76% from $210 to $200. As a result, the underlying position changes to $657.14 ($690*94.74%), while the NAV changes to $197.14 ($657.14-2*230). Therefore after 2 days of drifting, ETHBULL is down -1.4% ($197.14/$200-1), which is lower than 0%.
- Sideways Drift: Decrease then Increase
On Day 1, ETH decreases from $200 to $190. After rebalancing, the underlying position of ETHBULL will be $510 ETH-PERP.
On Day 2, ETH increased by 5.26% from $190 to $200. As a result, the underlying position changes to $536.84 ($510*105.26%), while the NAV changes to $196.84 ($536.84-2*$170). Therefore after 2 days of drifting, ETHBULL is down -1.6% ($196.84/$200-1), which is lower than 0%.