Lecture 7: Mechanism

Overview:

The share merging mechanism is triggered whenever the net value of a leveraged ETF product falls below 0.1 USDT. We will merge x shares of the product together to form a single unit while diluting the trader’s holdings x times . This means that if 10 units are merged together to form a single unit with 10x its original value, the quantity of held assets will be reduced to 10% of its original. The total value of the trader’s held assets therefore remains unchanged.

Example:

Let’s assume the price of ALGO3L is now 0.002 USDT and a trader has 10 units of it. Because the price of the product has fallen beneath 0.1 USDT, the share merging mechanism is triggered. Assuming that the basis upon which the share merging happens is 10x, the price of ALGO3L will be increased tenfold to 0.02 USDT while the quantity of the trader’s held funds is reduced to 1. The total asset value remains unchanged at 0.02 USDT.

Rationale:

The volatility of the crypto market means the unit value of some leveraged crypto ETFs may sometimes plunge. Additional fluctuations at that stage would result in disproportionate impacts on the price of the ETF. The share merging mechanism was therefore introduced to improve price sensitivity and provide traders with a better experience in the market.

Disclaimer:

Crypto Leveraged ETFs are an emerging financial product. The content above does not constitute investment advice. Please be aware that all investments carry risk. Trading leveraged ETFs may seem simple but inexperienced/amateur traders should be wary as cryptocurrencies can be highly volatile.

Crypto Leveraged ETFs may reduce the risk of liquidation, but in extreme conditions their price may approach zero and they may be liquidated. Please pay attention to the difference between order price and net value to avoid losses.