Pros and Cons of ETF Leveraged Tokens

Advantages of ETF Leveraged Tokens

• Built-in Leverage: No margin required, no liquidation risk
• Auto-Rebalancing: Daily rebalancing to maintain target leverage
• Flexible Exposure: Both long and short leveraged tokens available — profit in either direction
• Transparent Fees: Only a management fee (typically 0.1% per day)
• User-Friendly: Trade like spot assets, no need to worry about forced liquidation

Disadvantages of ETF Leveraged Tokens

1. Leverage Risk

Leveraged tokens amplify the price movements of the underlying asset through financial derivatives (such as perpetual contracts and futures). This means:

• Amplified Gains: When the underlying asset price increases, the token’s return is magnified.
• Amplified Losses: When the underlying asset price decreases, the token’s loss is also magnified.

Example: If the underlying asset drops 10%:

• A 3x leveraged token may lose 30% in value
• A 5x leveraged token may lose 50% in value

2. High Volatility Decay — Not Suitable for Long-Term Holding

The net asset value (NAV) of leveraged tokens is highly sensitive to market volatility, especially during sharp price swings in the underlying asset.

Volatility decay refers to the phenomenon where, after the underlying asset first rises and then falls back (or vice versa), the leveraged token’s NAV ends up lower than its original value, even though the asset price returns to its starting point.