Due to the regulation of the rebalancing mechanism, XT ETF products are more suitable for uni-lateral markets, utilizing its compounding effect to expand trading returns; while in a bilateral oscillating market, this may result in greater capital loss.
Compound Interest Effect and Capital Loss
XT ETF products amplify the daily upside and downside of the underlying asset through the rebalancing mechanism (not multi-day, nor annualized gain/loss). When the underlying asset rises, the corresponding fund leverage will be lower than the target leverage, so the fund manager needs to increase the fund leverage by going long at a higher price; conversely, when the underlying asset falls, the fund leverage will be higher than the target leverage, so the fund manager needs to reduce the portfolio leverage by going short at a lower price.
It is due to this mechanism that in a unilateral market, daily position adjustment operation will generate compounding effect, while in a box oscillator market, the underlying asset price fluctuation will return to the original point, but the net value of the ETF holders' account will fall, which is the so-called capital loss.
The following will take the XT ETF variety BTC3L as an example to explain specifically how the so-called compounding effect and asset depletion are generated.
(I) Compound interest effect under unilateral market conditions
1. Unilateral rise
| Time | Day1 | Day 2 | Day 3 |
| BTC Price | 100 | 110 | 120 |
| BTC Spot Volatlity | 0.2 | ||
| BTC BTC 3x the volatility of perpetual contracts | 0.6 | ||
| BTC3L Volatility Range | 0.65451 | ||
BTC3L:
On the second day, BTC rises from 100 USDT to 110 USDT, an increase of 10%; at this time, the net value of BTC3L is: 100*(1+10%*3) = 130 USDT;
On the third day, BTC rose from 110 USDT to 120 USDT, an increase of 9.09%; at this time, the net value of BTC3L is: 130*(1+9.09%*3)=165.451 USDT;
In this cumulative two-day unilateral uptrend market, the overall increase of BTC3L is: (165.451-100)/100*100%=65.451%>60%.
It can be seen that in a unilateral uptrend market, compared with the same leverage multiples of the permanent contract products, ETF products have a greater return and more advantageous.
2. Unilateral Decline
| Time | Day1 | Day 2 | Day 3 |
| BTC Price | 100 | 90 | 80 |
| BTC Spot Volatlity | -20% | ||
| BTC BTC 3x the volatility of perpetual contracts | -60% | ||
| BTC3L Volatility Range | -53.33% | ||
BTC3L:
On the second day, BTC falls from 100 USDT to 90 USDT, a drop of 10%; at this point, the net value of BTC3L is: 100*(1-10%*3) = 70 USDT;
On the third day, BTC fell from 90 USDT to 80 USDT, a drop of 11.11%; at this time, the net value of BTC3L was: 70*(1-11.11%*3) = 46.669 USDT;
In the cumulative two-day unilateral uptrend market, the overall decline of BTC3L is: (100-46.669)/100*100%=53.331%< 60%.
It can be seen that in a unilateral downtrend market, ETF products have less losses and more advantages than permanent contract products with the same leverage.
Note: For ease of calculation and understanding, the above examples ignore potential transaction costs such as transaction fees and contract funding fees during the actual trading process.
(ii) Loss of funds in bilateral oscillating market
1. Up and down
| Time | Day1 | Day 2 | Day 3 |
| BTC Price | 100 | 110 | 100 |
| BTC Spot Volatlity | 0% | ||
| BTC 3x the volatility of perpetual contracts | 0% | ||
| BTC3L Volatility Range | -5.45% | ||
BTC3L:
On the second day, BTC rises from 100 USDT to 110 USDT, an increase of 10%; at this time, the net value of BTC3L is: 100*(1+10%*3) = 130 USDT;
On the third day, BTC fell from 110 USDT back to 100 USDT, down 9.09%; at this time, the net value of BTC3L is: 130*(1-9.09%*3) = 94.549 USDT;
In this cumulative two-day shock market, the overall change of BTC3L is: (94.549-100)/100*100%=-5.451%.
2. Down and up
| Time | Day1 | Day 2 | Day 3 |
| BTC Price | 100 | 90 | 100 |
| BTC Spot Volatlity | 0% | ||
| BTC 3x the volatility of perpetual contracts | 0% | ||
| BTC3L Volatility Range | -6.67% | ||
BTC3L:
On the second day, BTC falls from 100 USDT to 90 USDT, a drop of 10%; at this point, the net value of BTC3L is: 100*(1-10%*3) = 70 USDT;
On the third day, BTC rose from 90 USDT to 100 USDT, an increase of 11.11%; at this time, the net value of BTC3L is: 70*(1+11.11%*3)=93.333 USDT;
In this cumulative two-day unilateral up market, the overall decline of BTC3L is: (93.333-100)/100*100% = -6.667%
It can be seen that in such bilateral oscillating markets as up and down and down and up, although the price of BTC has returned to the origin, the net value of the ETF has already incurred some losses. Therefore, ETFs are only suitable for short-term unilateral market, not for long-term oscillating market.
Risk Warning: XT ETF is an emerging financial derivative product, theoretically, there is no risk of position blowout, but in extreme market conditions, ETFs may have the risk of net value approaching zero, so please be sure to understand the relevant rules of the product and pay attention to risk control before trading.