What are inverse tokens?
Inverse tokens are ERC20 tokens which seek to deliver notional exposure to the inverse returns of underlying cryptoassets such as Bitcoin (BTC) and Ether (ETH) before fees and expenses. They are designed for token holders seeking tactical day trades against a given respective underlying cryptoassets. A lot of the aspects of inverse tokens are automated through the use of our smart contracts which helps provide a frictionless trading experience. As such, traders do not need to rely on margin trading nor are they forced to deal with margin calls.
For example, our first inverse token, BTCSHORT, seeks to deliver notional exposure to the inverse performance of Bitcoin (-1x) on a daily basis. As such, if the price of Bitcoin falls by 3% today, BTCSHORT’s value, before fees and expenses, will increase by roughly the same percentage, 3%.
Why use inverse tokens?
Inverse tokens allow token holders to make a bet that a cryptoasset will decline within a day and profit from it if their hypothesis holds true. If the price of a cryptoasset falls, the inverse token rises by roughly the same percentage before fees and expenses. As such, inverse tokens are best suited to be used during market downturns on a single day.
These are also the four advantages of using our inverse tokens:
- Zero hassle: Traders don't have to worry about managing funding rates, borrowing costs or monitoring positions for risks of margin calls.
- Daily rebalancing: Each token rebalances daily to ensure constant inverse ratios of the underlying assets are always maintained. This prevents the token holder from getting liquidated as is the case when borrowing cryptoassets to maintain a short position.
- Tradability: Our tokens are listed on the leading crypto exchanges making it easier to enter and exit positions on the secondary market.
- Best execution: Our smart order routing features allow for intended exposure at the lowest trading rates across the digital asset market.
When do inverse tokens do well?
Inverse tokens are not suited for long-term investments since the underlying cryptoasset is bought and sold on a daily basis by the Jasper Token Manager accessible through our official website. They are rather better suited for a daily bet on the decline of the underlying cryptoasset such as Bitcoin and Ether. As a result, inverse tokens enable investors to benefit when the performance of the underlying cryptoasset declines within a day.
What inverse tokens are currently available?
We currently have one inverse token available:
- BTCSHORT — Amun Short 1x Bitcoin Token
How do you acquire inverse tokens?
Inverse tokens are available through two means:
- On a spot exchange, currently available on HitBTC, Liquid, Bequant, and Bitcoin.com Exchange.
- Or directly through Amun’s token platform called Jasper.
How do we maintain short exposure with inverse tokens?
A 1:1 ratio between the amount of Bitcoin borrowed and the cash deposit that the token holders uses to mint BTCSHORT are set up to maintain the inverse relationship between the daily performance of the underlying cryptoassets and the daily value of the inverse token value before fees.
Let’s get into the nuts and bolts of BTCSHORT's backend. There are a few important concepts to know before properly understanding how BTCSHORT maintains notional exposure to the inverse of Bitcoin’s daily performance.
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Minting BTCSHORT simply means one will receive the BTCSHORT token worth of the USDC amount deposited to the smart contract. Let’s take an example:
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100 BTCSHORT Tokens = 1 BTC |
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1 BTC = $10,000 |
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$10,000 = 10,000 USDC |
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Therefore, 100 BTCSHORT = 10,000 USDC |
In order for minting to occur, you would transfer 10,000 USDC to our smart contract. Our smart contract would read this as an order to MINT, thus eventually initiating 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, 10,000 USDC). In other words, we’d end up with 100,000 USDC from the token holders for 1 Bitcoin borrowed at 10,000 USDC. Therefore, the appropriate ratio is 10,000 / 10,000 = 1 (ie, 1:1 ratio).
So how do we calculate BTCSHORT’s token value?
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Total USDC Amount: 20,000 USDC |
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USDC Amount from Token Holder: 10,000 USDC |
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Bitcoin Borrowed: 1 BTC |
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Current Bitcoin Price: 10,000 USDC |
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Total Supply: 100 BTCSHORT |
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Net Token Value: 20,000 - 10,000*1 = 10,000 |
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1 BTCSHORT Value = 10,000/100 = 100 USDC |
We’ll walk you through two scenarios reflecting the price action of Bitcoin and how BTCSHORT maintains a -1x notional value of the daily performance of Bitcoin:
- When the price of Bitcoin drops below $10,000 or 10,000 USDC
- When the price of BTC increases beyond the $10,000 mark.
- If the price of Bitcoin goes down to $8,000:
Let’s say at the time of rebalancing the price of Bitcoin falls to $8,000
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Total USDC Amount: 20,000 USDC |
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USDC Amount from Token Holder: 10,000 USDC |
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Bitcoin Borrowed: 1 BTC |
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Current Bitcoin Price: 8,000 USDC |
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Total Supply: 100 BTCSHORT |
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Net Token Value: 20,000 - 8,000*1 = 12,000 |
However, the ratio is now 1.25 (ie, 10,000 USDC / 8,000 USDC) for 1 BTC borrowed. As such, on the backend, we’ll borrow and then sell 4,000 USDC worth of BTC to get to this ratio. In other words, borrow 0.5 BTC worth USDC.
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Total USDC Amount: 24,000 USDC |
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USDC Amount from Token Holder: 12,000 USDC |
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Bitcoin Borrowed: 1.5 BTC |
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Current Bitcoin Price: 8,000 USDC |
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Total Supply: 100 BTCSHORT |
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Net Token Value: 24,000 - (8,000*1.5) = 12,000 USDC |
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1 BTCSHORT Value = 12,000/100 = 120 USDC |
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Your 100 BTCSHORT bought at 10,000 USDC is now worth 12,000 USDC with a price of Bitcoin of 8,000 USDC |
- If the price of Bitcoin goes up to $12,000
Now let’s look at the opposite case where the price of Bitcoin increases to $12,000.
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Total USDC Amount: 20,000 USDC |
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USDC Amount from Token Holder: 10,000 USDC |
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Bitcoin Borrowed: 1 BTC |
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Current Bitcoin Price: 12,000 USDC |
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Total Supply: 100 BTCSHORT |
With a new ratio of 1.33:1, we would thus need to decrease the amount of Bitcoin borrowed by 4K USDC (0.33 BTC) in order to get back to that 1:1 ratio. We would do this by buying back BTC with the USDC held in the smart contract. In this case, 4K USDC bought from the open market and returned to the lender.
Net Token Value: 16,000 - (12,000 * 0.66) = 8000 USDC
1 BTCSHORT Value: 8000/100 = 800 USDC
Your 100 BTCSHORT bought at 10,000 USDC is now worth 8,000 USDC.
How do inverse tokens rebalance?
Our inverse tokens rebalance in two ways:
- Once a day at 5 PM CET in order to maintain the correct amount of daily exposure to Bitcoin or other cryptoassets, as we show in the previous section: “How do we maintain short exposure with inverse tokens?”.
- If the underlying cryptoasset such as Bitcoin increases or decreases by 33% within 24 hours, inverse tokens would rebalance at this point while still rebalancing at 5 PM CET.
What is a rebalance threshold?
A rebalance threshold is the price-performance limit to which the inverse tokens will automatically rebalance and not necessarily at 5 PM CET. See the previous section for more information “How do inverse tokens rebalance?“
What is Jasper?
In implementing the inverse tokens, we are using a proprietary system known as Jasper which consists of the Jasper Token Manager, through which Authorized Users place Mint and Burn requests, the Jasper Trading Engine which we may use to hedge our own exposures and the Oracle which acts as a data store and bridge between the different parts of Jasper and any on and off-chain transactions. To the extent it chooses to hedge its exposure, the Issuer, Amun, will use off-chain OTC Trading Desks and Lending Desks through opening short positions and pegging negative crypto exposure to the inverse tokens.
What is the fee structure?
There are two types of fees associated with the Inverse Tokens:
- Mint and Burn Fee (0.1%): Charged on each MINT OR BURN order initiated by an Authorized User.
- Fees deducted from the value of the Inverse Tokens each day:
- Maintenance Fees (0.03% per day): A daily rate accrued on the outstanding value of the inverse tokens collected during a daily rebalance and reducing a holder’s notional exposure.
What do inverse tokens hold?
Amun Limited (ie, the Issuer) is not obliged to hold any assets to back the tokens and holders have no rights in any assets of the Issuer. However, the issuer may choose to hold assets equivalent to the value of the tokens such as assets as it determines in its discretion. The token issuer rebalances on a daily basis the net token value of the inverse tokens in order to maintain the stated exposure.
How does compounding affect inverse tokens?
Compounding is the process in which inverse tokens’ earnings, from mainly capital gains, are reinvested to increase earnings over time. Inversely, this process could also generate losses in case the price of the underlying cryptoasset goes up. As such, inverse tokens will generate earnings or losses from both their initial principal and the accumulated earnings or losses from preceding periods. Compounding is importantly different from linear growth also called simple interest where only the principal earns interest each period.
In the diagram below we compare simple interest and compounding interest to explain how compounding works. In both cases, we start with an amount of $1,000 and the interest is 10% of that – $100. In the simple case, this means that on each day exactly $100 accrues as interest. Therefore the total amount of interest after three days is $300 - with a total amount of $1,300.
This is different for compounding interest. Here the interest made in day one is added to the base amount in day two. This means $100 is added to the base amount of $1000 so the base amount of day two is $1100. Therefore on day two, the total interest is 10% of the new base amount and therefore 10% of $1100 which is $110. This repeats again on day three. In the end, this means that the interest gets larger as the base amount gets larger. In total, compounding leads to a total interest of $331 in this example. Compounding means that total returns over a week, for example, depending on the daily returns within the week and changes to the initial base amount due to the daily returns on each day within the week.
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Simple Interest |
Compounding Interest |
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Day 1 |
Principal: $1,000 Interest: $100 |
Principal: $1,000 Interest: $100 |
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Day 2 |
Interest: $100 Amount: $1,000 |
Interest: $110 Amount: $1,100 |
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Day 3 |
Interest: $100 Amount: $1,000 |
Interest: $121 Amount: $1,210 |
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Total Interest |
$300 |
$331 |
Due to the daily reset of the BTCSHORT token, compounding comes into effect after a token is held for longer than a day (past 5 PM CET). This is extremely risky and the reason why the advised holding horizon for BTCSHORT is equal to or less than a day, but not more.
For BTCSHORT, even though it tracks a -1x exposure with Bitcoin on a daily basis, the daily reset causes compounding. This can lead to positive or negative effects if BTCSHORT is held for more than one day as BTCSHORT’s price can be volatile over multiple days. If BTCSHORT is held for longer than its reset period of a day, then the effects of compounding on its return profile may be unintuitive.
As such, it is important to note that holding BTCSHORT for longer than a day can mean that compounding works against you, causing unexpected losses.
What are the risks of investing in inverse tokens?
- Exchange risk
The Issuer is seeking to make the Tokens available on various token exchanges. Holders should note that the Issuer cannot guarantee that the Tokens will be accepted for trading on such exchanges or that an active market in the Tokens will develop on such exchanges. In addition, at any time, the value at which the Tokens trade on any exchange may not reflect accurately the Token Value as it will be a function of supply and demand amongst Holders wishing to buy and sell those Tokens on a particular exchange. The Issuer will seek to ensure that there are market makers for the Tokens operating on the relevant exchanges to maintain an active market at any time but is not required to do so. As a result, holders of the Tokens are at risk of being unable to sell their Tokens at the time or value they desire.
- Currency risk
The Tokens of each type are denominated and valued in a stablecoin Base Currency. To the extent a Holder makes Mint Payments in any other currency or values their investments in another currency, fiat or crypto, the value of Tokens they receive or the value they give to the Tokens, will be impacted by changes in the exchange rate between the relevant Base Currency and that other currency.
- Risk associated with deletion of recent transactions
As private keys are needed to create transactions in the Tokens and the Reference Assets, a participant is not able to create new transactions without such private keys, however, may in certain circumstances it is possible to delete recent transactions without the private key. Whilst it is thought that this would be impossible to accomplish without being discovered and it is difficult to see a scenario in which the participant would be able to achieve a financial profit, such a scenario would certainly materially damage the confidence in a Token or a Reference Asset whether any financial losses or other improprieties occur or not.
- Loss of Private Keys
Private keys are required to create transactions in the Tokens. If a Holder loses the private key(s) for, or otherwise loses access to the wallets in which they hold the Tokens, the Issuer will not be able to recover those Tokens on behalf of the Holder and the Holder will lose the value of those Tokens.
- Transfer Risk
If Tokens, Mint Payments or Burn Proceeds are sent to an incorrect address, there may be no way of recovering those Tokens, Mint Payments or Burn Proceeds. Holders should note that an Ethereum address with positive Token balances may not correspond to any actual user or private key and may be the result of a mistake. Tokens transferred to incorrect addresses will likely be lost.
What is the appropriate holding period for inverse tokens?
The appropriate holding period for an inverse token is 1 day or less.
How do we prevent front running?
Open-market purchases and borrows for our inverse tokens are carried out across multiple venues to prevent front-running.
Disclaimer
This document has been prepared and issued by Amun Limited (“Amun”). This document may contain market commentary. All information used in the publication of this document has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this document or the information contained/referenced herein.
This document may contain independent market commentary prepared by Amun based on publicly available information. Although Amun endeavors to ensure the accuracy of the content in this document, Amun does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this document make no warranties or representation of any kind relating to such data. Where Amun has expressed its own opinions related to product or market activity, these views may change. Neither Amun, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this document or its contents.
Crypto asset trading involves a high degree of risk. The crypto asset market is new to many and unproven and may have the potential to not grow as expected. Currently, there is relatively small use of crypto assets in the retail and commercial marketplace in comparison to relatively large use by speculators, thus contributing to price volatility that could adversely affect an investment in crypto assets. In order to participate in the trading of crypto assets, you should be capable of evaluating the merits and risks of the investment and be able to bear the economic risk of losing your entire investment.
Nothing in this document (or any other documents mentioned herein) is or should be considered to be an invitation to enter into an investment and is not intended to be an offering of securities in any jurisdiction nor does it constitute an offer or an invitation to sell shares, securities or rights belonging to the Issuer or any related or associated company. This document has not been registered with or approved by any regulator in any jurisdiction. Readers are cautioned that any historical performance information or forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results or performance may differ materially from those in the forward-looking statements as a result of various factors. The information contained herein may not be considered as economic, legal, tax, or other advice and users are cautioned against basing undue reliance, investment decisions or other decisions solely on the content hereof.
Any historical performance included in this document may be based on back testing which is a means of evaluating a particular strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested performance is purely hypothetical and is provided in this document solely for informational purposes and neither represents actual performance nor should it be interpreted as an indication of actual or future performance.
The Tokens are complex products which incorporate a high degree of risk and should only be bought or traded in by persons with appropriate technical knowledge who have experience with similar products.
The Tokens have not been registered with or approved by any regulator in any jurisdiction. The Tokens are not available for purchase by individuals or entities who are ordinarily resident in the United States, Switzerland, the Seychelles or any other country on the Prohibited List.
The Issuer reserves the right to restrict the sale of the Tokens in any jurisdiction or to any individuals or entities from time to time.
Please see our legal documents for more information.