Leveraged tokens perform best in times of momentum. When the market is trending in a particular direction, these tokens will outperform spot markets and derivatives contracts as the tokens. For example, if the market is consistently trending upward our BTC3L or ETH3L token will outperform as the profits are used to continuously increase your net exposure. On the other hand, the same could be said for the BTC3S and ETH3s when the market is consistently trending downward.
Leveraged tokens will underperform during periods of market volatility. While the compounding benefits the holders during consistently-trending markets, it can also hinder returns when there is volatility. You can see these results through the simulator on our website.
Lets look at the below example.
If ETH moves in your favor and goes up the following day, ETH3X does better than a 3x leveraged long position, because the profits from the first day were reinvested back into ETH. Essentially, it longed your long position. However, if ETH goes up and then goes back down, ETH3X does worse, because it increased your exposure after the first day. That original increase in exposure will harm your PNL.