What are leveraged tokens?
Leveraged tokens are Ethereum-based ERC-20 tokens created by Amun to give token holders easy access to leveraged long and short daily returns of cryptoassets like Bitcoin and Ether. To put it simply, a leveraged token maintains notional exposure to -2x or -3x of the daily returns of a crypto asset like Bitcoin or Ethereum. This made possible through the use of Amun’s Jasper platform which facilitates margin positions in the cryptoassets in question both for long and short positions through the use of perpetual swaps, whilst also rebalancing on a daily basis in order to maintain daily notional leveraged exposure.
To give an example, our BTC3L tokens maintain notional exposure to 3x of the daily returns of Bitcoin and our ETH3S tokens maintain notional exposure to -3x of the daily returns of Ether. This means that if Bitcoin were to rise by 3% on a single day then BTC3L would aim to rise by 9% on the same day. The use of these tokens greatly improves the user experience of maintaining leverage to cryptoassets.
Why use leveraged tokens?
There are four main reasons why our leveraged tokens are useful:
- 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 leverage ratios of the underlying assets are always maintained. This prevents the token holder from getting liquidated as is the case when leverage is used for futures and perpetual swap contracts.
- Tradability: Our tokens are listed on the leading crypto exchanges making it easier to enter and exit positions on the secondary market
- Reduced Liquidation Risk: When losing money leveraged tokens reduce exposure, thus greatly reducing the chance of liquidation. It would require a 33% 24-hour change in price for a liquidation to occur
When do leveraged tokens do well?
BTC3L does well when the price of Bitcoin increases in a single day and BTC3S does well when the price of Bitcoin decreases in a single day. For example, if Bitcoin increased by 3% in a single day then BTC3L would increase by 9% that same day. Conversely, if Bitcoin decreased by 3% in a single day then BTC3S would increase by 9% that same day, excluding fees and expenses.
Leveraged tokens will outperform their equivalent margin trading positions (i.e. holding BTC3L compared to holding a 3x leverage position in Bitcoin) in a trend-following or momentum-driven market but will underperform their equivalent margin trading positions in a mean-reverting market. The two tables below show an example of leverage token’s performance in both trend-following and mean-reverting markets:
- Trend-following Market
|
BTC |
BTC Returns (%) |
BTC3L |
BTC3L Returns (%) |
BTC3S |
BTCSHORT Returns (%) |
|
|
Day 0 |
$100 |
- |
$100 |
- |
$100 |
- |
|
Day 1 |
$103 |
3% |
$109 |
9% |
$91 |
-9% |
|
Day 2 |
$106.09 |
3% |
$118.81 |
9% |
$82.81 |
-9% |
|
Total Returns |
6.09% |
18.81% |
-17.19% |
- Mean-reverting Market
|
BTC |
BTC Returns (%) |
BTC3L |
BTC3L Returns (%) |
BTC3S |
BTCSHORT Returns (%) |
|
|
Day 0 |
$100 |
- |
$100 |
- |
$100 |
- |
|
Day 1 |
$103 |
3% |
$109 |
9% |
$91 |
-9% |
|
Day 2 |
$100 |
-2.9% |
$99.52 |
-8.7% |
$98.92 |
8.7% |
|
Total Returns |
0% |
-0.48% |
-0.08% |
As you can see, the leverage tokens perform worse in a mean-reverting market due to the effects of compounding as we describe in the sections below.
What leverage tokens are currently available?
We currently have four leveraged tokens available:
- BTC3L — Amun Long 3x Bitcoin Token
- BTC3S — Amun Short 3x Bitcoin Token
- ETH3L — Amun Long 3x Ether Token
- ETH3S — Amun Short 3x Ether Token
How do you acquire leveraged tokens?
- Leveraged tokens are available through two means: on a spot exchange or directly through Amun’s token platform. Users are able to mint and burn leveraged tokens by depositing USDC into our smart contracts through our platform. Mint and burn requests are processed between 4:50 – 5:00 PM.
- Our leveraged tokens are currently available on HitBTC, Liquid, Bequant, and Bitcoin.com Exchange.
How do leverage tokens work?
Leveraged tokens are intended to maintain long or short 2x or -3x exposure to cryptoassets such as Bitcoin or Ether. This means that if Bitcoin increases by 3% in a single day then a long leveraged token like BTC3L will increase by 9% and conversely a short leveraged token like BTC3S will decrease by 9% on the same day. Let’s take a very simple example; what would happen to the prices of BTC3L and BTC3S if Bitcoin’s price over 3 days is as follows: Day 0 — $100, Day 1 — $103, Day 2 — $106.09, in other words two days of Bitcoin increasing by 3%. We assume that Bitcoin, BTC3L, and BTC3S all begin day 0 at a price of $100.
|
BTC |
BTC Returns (%) |
BTC3L |
BTC3L Returns (%) |
BTC3S |
BTCSHORT Returns (%) |
|
|
Day 0 |
$100 |
- |
$100 |
- |
$100 |
- |
|
Day 1 |
$103 |
3% |
$109 |
9% |
$91 |
-9% |
|
Day 2 |
$106.09 |
3% |
$118.81 |
9% |
$82.81 |
-9% |
|
Total Returns |
6.09% |
18.81% |
-17.19% |
As we can see, both BTC3L and BTC3S track 3x and -3x of Bitcoin’s returns over a single day. Please note that these tokens do not track 3x or -3x of Bitcoin’s returns over multiple days. For example, it’s easy to see that the two day return of BTC3L (18.81%) is actually more than 3x of Bitcoin’s (6.09%) and the two day return of BTC3S (-17.19%) is actually less than -3x of Bitcoin’s. This phenomenon is due to the compounding of our inverse and leveraged tokens and can be beneficial in situations where the market is following a trend but harmful in periods of mean reversions. The following example shows how the tokens would perform in a mean-reverting market. Here Bitcoin’s price moves as follows: Day 0 — $100, Day 1 — $103, Day 2 — $100, in other words Bitcoin increases by 3% on day 1 and then decreases by 2.9%.
|
BTC |
BTC Returns (%) |
BTC3L |
BTC3L Returns (%) |
BTC3S |
BTCSHORT Returns (%) |
|
|
Day 0 |
$100 |
- |
$100 |
- |
$100 |
- |
|
Day 1 |
$103 |
3% |
$109 |
9% |
$91 |
-9% |
|
Day 2 |
$100 |
-2.9% |
$99.52 |
-8.7% |
$98.92 |
8.7% |
|
Total Returns |
0% |
-0.48% |
-0.08% |
These examples illustrate the purpose of holding leveraged tokens for a period of one day and not longer. Over longer days, due to compounding, they do not maintain their level of leverage exposure to Bitcoin’s long term returns.
How do we maintain leverage exposure with leveraged tokens?
Our leveraged tokens maintain notional positive or negative 2x or 3x exposure to cryptoassets like Bitcoin or Ether through the use of perpetual swap contracts. These contracts allow us to get leveraged exposure to cryptoassets such as Bitcoin and Ether and we adjust this exposure on a daily basis based on our position’s Profit and Loss (PnL). Let’s consider a case of how BTC3S maintains its -3x leveraged exposure. Essentially, the procedure for the rebalance process can be outlined as follows:
- Following a change in the mark price of Bitcoin perpetual swap contracts on exchange, we calculate the PnL of the outstanding tokens
- Calculating the PnL allows us to calculate three variables: (1) Required Exposure; (2) Current Exposure; (3) Rebalance Amount
- Required Exposure in BTC (RE) = Target Leverage * Token Value (in USD) / Volume-weighted Average Mark Price (VWAP)
- Current Exposure in BTC (CE) = Per Token Bitcoin Perpetual Swap Position
- Total Rebalance Amount in BTC (RA) = (RE - CE) * Token Supply
- Total Rebalance Amount in USD = RA * Bitcoin Perpetual Swap VWAP
Suppose the mark price of a Bitcoin perpetual swap contract on two exchanges — Exchange A and Exchange B — is $10,000, that there are four outstanding BTC3S tokens, and that the initial price of the BTC3S token is $10,000. The inception price of at this stage for Bitcoin would be a volume-weighted average of the mark price of the Bitcoin perpetual contracts on the exchanges and therefore would also be $10,000.
In total, Jasper’s proceeds from selling the tokens would be $39,960 which is the amount of tokens multiplied by the current token price then multiplied by 1 - CR/RD fee.
To summarise:
Number of tokens: 4
Token Value: $10,000
Exchange A Bitcoin Mark Price: $10,000
Exchange B Bitcoin Mark Price: $10,000
Perpetual Swap Inception Price: $10,000
Leverage: -3
Cash [(Token Value x Number of tokens)*(1 - CR/RD Fee)]: $39,960
Total Notional Exposure (in BTC): -11.988
Notional Exposure Per Token (in BTC): -2.977
Let’s say Bitcoin’s price increases by exactly 5.5% on exchange A and 4.5% on exchange B. Also, let’s assume 40% of perpetual swap exposure is sourced from exchange A and 60% from exchange B. To calculate the volume-weighted price and therefore the appropriate price change we must account for each exchange’s funding rate and the aforementioned volume breakdown.
Exchange A:
Mark Price: $10,500
Percentage Change: 5.5%
Notional Exposure Executed: -4.795
Funding Rate (%): 0.02%
Funding Rate: $10.12
Synthetic PnL: -$2,627.24
Exchange B:
Mark Price: $9,500
Percentage Change: 4.5%
Notional Exposure Executed: -7.193
Funding Rate (%): 0.03%
Funding Rate: $22.55
Synthetic PnL: -$3,214.21
Therefore, we can calculate the VWAP of the perpetual swap contract by taking a weighted average of the two exchange’s prices. We also take a VWAP of the funding rates, this allows us to calculate the aggregate synthetic PnL.
VWAP:
VWAP Price: $10,490
VWAP Price Change: 4.90%
Total Amount Executed (in BTC): -11.988
VWAP Funding Rate (%): 0.026%
Funding Rate Fee ($): $32.70
Aggregate Synthetic PnL (Change in VWAP Price * Notional Exposure + Funding Fee): -$5,841.42
Despite this reduction in the PnL of the token’s positions, we still have BTC3S tokens outstanding which means that the PnL per token is -$1,461.82
Tokens Outstanding: 3.9960
Per Token PnL: -$1,461.82
Per Token Notional Exposure (in BTC): 3
Per Token Notional Exposure (in $): -$31,470
Therefore, the token value at the end of the period is $8,538.18 compared to $10,000 at the start of the period.
Token Value (End of Period): $10,000 - $1,461.82 = $8,538.18
However, the implied leverage is considerable higher than -3 at this point:
Implied Leverage (Per Token Notional Exposure/Token Value): -3.6858
Therefore, we need to undergo a rebalance to adjust the implied leverage back to the target of -3. Before the rebalance is initiated, the 0.03% daily fee is taken from the token’s holdings.
Per Token Daily Fee (11%/365 * Token Value): $2.57
Token Value Post Fee: $8,535.61
Pre Rebalance Notional per Token (BTC): -3
Total Pre Rebalance Exposure: -11.99
Target Leverage: -3
From the above numbers, we can work out the Per Token Notional value that we want adjust to:
Notional $ Value to Execute (Target Leverage * Token Value Post Fee): -$25,606.83
Notional BTC Value to Execute: -2.441
Required rebalance amount Per Token (USD): $31,470 - $25,606.83 = $5,863.17
Required rebalance amount Per Token (BTC): 0.5589
Therefore, we would close 2.2166 BTC worth of our short positions in the BTC perpetual swap contracts in order to have a Total Post Rebalance Exposure of -9.7734026.
Therefore, the post-rebalance notional per token is -2.44 BTC, equivalent to -$25,606.83. This brings us back to our target leverage of -3.
Number of tokens: 3.966
Token Value: $8,535.61
Exchange A Bitcoin Mark Price: $10,490
Exchange B Bitcoin Mark Price: $10,490
Implied Leverage: -3
Cash [(Token Value x Number of tokens)]: $33,852.22
Total Notional Exposure (in BTC): -9.773
How do leveraged tokens rebalance?
Our leverage tokens rebalance 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 “How do we maintain leverage exposure with leveraged tokens?” section.
While leverage tokens automatically rebalance at 5 PM CET every single day, they will also rebalance if the daily returns of their underlying cryptoasset changes by a specific amount. The threshold amount is the following for tokens with different levels of leverage:
- 3X Leverage Tokens (i.e. BTC3L, BTC3S, ETH3L, ETH3S): 15%
For example, if Bitcoin were to go up by 15% on a single day at 11 AM CET then BTC3L would rebalance at that point and then also rebalance at 5 PM CET. This would only happen in cases where the market moves against the stated exposure — therefore as a stop loss.
What is a rebalance threshold?
A rebalance threshold is the return of the underlying crypto asset at which the leverage tokens will automatically rebalance and not necessarily at 5 PM CET. See the previous section “How do leverage tokens rebalance? “
What do leveraged 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 leveraged tokens in order to maintain the stated exposure.
How does compounding affect leveraged tokens?
Due to the daily rebalancing of leverage tokens to maintain their leveraged exposure to Bitcoin’s (and other cryptoassets’) daily returns, compounding affects their performance over multiple days. This is because if a leverage token performs well on one day then the exposure of the token to its underlying crypto asset will increase, in such a scenario the profits from that day would be reinvested into the token which would lead to compounding on the next day.
|
BTC |
BTC Returns (%) |
BTC3L |
BTC3L Returns (%) |
BTC3S |
BTCSHORT Returns (%) |
|
|
Day 0 |
$100 |
- |
$100 |
- |
$100 |
- |
|
Day 1 |
$103 |
3% |
$109 |
9% |
$91 |
-9% |
|
Day 2 |
$106.09 |
3% |
$118.81 |
9% |
$82.81 |
-9% |
|
Total Returns |
6.09% |
18.81% |
-17.19% |
As we see from the previously-used example, on Day 2 BTC3L and BTC3S are subject to compounding as BTC3L’s returns on day 2 are applied to a higher price than on the previous day whilst BTC3S’s returns on day 2 are applied to a lower price than on the previous day.
Due to compounding, leverage tokens do not track the returns of their underlying over multiple days. This can be beneficial in periods where there are trends (i.e. where Bitcoin goes up on day 1 and goes up on day 2) but can lead to reduced performance where Bitcoin is in a mean-reverting environment (i.e. goes up on day 1 and then down on day 2).
What is Jasper?
Jasper is Amun’s token issuance platform which allows users to mint and burn tokens and also handles all aspects of the rebalancing process for our inverse and leveraged tokens.
What is the fee structure?
There are two fees associated with leveraged tokens: mint/burn and management fees. The mint/burn fee is 0.1% of the total value of tokens being minted or burned. The management fee is 0.03% per day of the total value of tokens held.
What are the risks of investing in leveraged 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 key, 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 leverage tokens?
The appropriate holding period for a leveraged token is 1 day or less.
How do we prevent front running?
Open-market purchases and borrows for our leveraged tokens are carried out across multiple venues to prevent front-running.