Our -1x tokens provide you with short exposure through the use of margin trading. Margin trading involves borrowing crypto (either through a broker, exchange,or lending facility), and immediately selling it. Should the price of Bitcoin decline, we would buy the coin back at a lower price, return to the borrower, and pocket the difference.
Lets take a look at the example below to explain further:
Suppose Bitcoin is trading at $10,000 and the price to mint BTCSHORT is 100 USDC. Say you want to buy 100 BTCSHORT tokens, which would effectively short 1 Bitcoin. To do this. you 10,000 USDC to our smart contract. Our smart contract would read this as an order to MINT. This would initiate an order to borrow 1 BTC from our lending platforms and immediately sell it on an execution venue for the current price (in this example lets say its 10,000 USDC). This additional USDC would be added to our smart contract, making the total balance 20,000 USDC.
When it comes to the price of our token, it should be trading at or around its implied value. The way you calculate the value is by taking the amount of USDC in the smart contract and subtracting the amount of BTC the token has borrwed. For an individual token, you would then take that amount and divide it by the total supply.
USDC Amount: 20,000 USDC
Bitcoin Borrowed: 1 BTC
Current Bitcoin Price: 10,000 USDC
Total Supply: 100 BTCSHORT
20,000 - 10,000*1 = 10,000 (we refer to this as the Net Token Value)
BTCSHORT Value = 10,000/100 = 100 USDC
For a -1x token, there should always be a 2:1 ratio between the amount of USDC in the contract and the USDC amount of Bitcoin that is borrowed. Lets say at the time of rebalance the price of Bitcoin falls to $8,000.
USDC Amount: 20,000 USDC
Bitcoin Borrowed: 1 BTC
Current Bitcoin Price: 8,000 USDC
Total Supply: 100 BTCSHORT
20,000 - 8,000*1 = 12,000
In order to maintain that 2:1 ratio, we would need to increase the amount of BTC borrowed by $4k. This would leave us at the following:
USDC Amount: 24,000 USDC
Bitcoin Borrowed: 1.5 BTC
Current Bitcoin Price: 8,000 USDC
Total Supply: 100 BTCSHORT
Net Token Value = 24,000 - (8,000*1.5) = 12,000 USDC
BTCSHORT Value = 12,000/100 = 120 USDC
Your 100 BTCSHORT bought at 10,000 USDC is now worth 12,000 USDC
Now lets look at the opposite case where the price of Bitcoin increases to $12,000
USDC Amount: 20,000 USDC
Bitcoin Borrowed: 1 BTC
Current Bitcoin Price: 12,000 USDC
Total Supply: 100 BTCSHORT
We would thus need to decrease the amount of Bitcoin borrowed by $4k (0.33 BTC) in order to get back to that 2:1 ratio
Net Token Value = 16,000 - (12,000 * 0.66) = 8000 USDC
BTCSHORT Value = 8000/100 = 800 USDC
Your 100 BTCSHORT bought at 10,000 USDC is now worth 8,000 USDC
As the above examples show, our tokens aim to provide you with a inverse exposure to the price of Bitcoin on a daily basis. It's important to note that over period longer than 1 day, your returns will not correlate strictly to the price performance of the underlying crypto. This is primarily due to the effects of compounding.