Rebalancing is a mechanism used to adjust the allocation of assets in an investment portfolio. For AscendEX’s leveraged tokens, rebalancing is a process where fund operators adjust a leveraged token’s futures positions for the underlying asset. When the underlying asset price changes, the leverage level of the leveraged token will change accordingly. Thus, it is essential to adjust the futures positions of a leveraged token for the underlying asset to maintain a target leverage for the leveraged token.
By daily tracking the leverage level of a leveraged token based on the market movements, the leveraged token is rebalanced at a specified time every day. This means the fund assets are liquidated every day at a specified time and a new leverage ratio for the fund will be recalculated based on the adjusted net value to closely track the target leverage.
Suppose the net value of a BTC leveraged token is 100 USDT and the futures positions of the BTC leveraged token with 3X leverage for the underlying asset are 3 BTC. This would result in futures positions that are worth 300 USDT. Suppose an investor buys 1 BTC3L for 100 USDT, then the BTC price of the day rises 5%, which would result in an increase of BTC3L’s net value by 15%. At this point, the BTC price is at 105 USD and the BTC3L holdings of the investor are worth 115 USD in net value. The corresponding futures positions would be valued at 315 USD. The price change leads the real leverage of BTC3L to change to 315/115=2.74, rather than the target leverage of 3X. Therefore, an extra 30 USD worth of positions need to be added to the futures positions of BTC3L to maintain the target level of 345/115=3. Similarly, if the underlying asset price falls, the futures positions need to be downsized to maintain the target leverage.
AscendEX’s leveraged token rebalancing mechanism is consisted of daily regular rebalancing and interim rebalancing.
Daily Regular Rebalancing
The platform rebalances leveraged tokens’ futures positions at 2:30 a.m. UTC every day.
If the market fluctuates abruptly and the price swing range of the underlying asset exceeds the given range set at the previous rebalance point, the platform will make a temporary rebalance to reduce trading risks. The temporary rebalance only targets the leveraged products that suffer losses due to market fluctuations.
Risk Disclosure: As an emerging financial derivative, theoretically, there is no liquidation risks for a leveraged token. However, with incorrect trend predictions, there will be a risk that the net asset value of a leveraged token approaches 0 amid extreme market conditions. Please fully understand the rules before engaging in leveraged token trading and be cautious to reduce potential risks.