What market conditions are ETFs for?
ETFs have advantages in one-sided markets. There are more frictional expenses in two-sided markets. Let's take BTC3L as an example to observe the profitability of ETFs under different market conditions:
3xBTC refers to conventional 3-time leveraged BTCUSDT perpetual futures
One-sided market: one way up
In the "one way up" scenario, ETFs perform better than conventional 3-time leveraged perpetual futures (3xBTC). Below is how the profit is calculated:
On the first day, the price for one BTC rises from $200 to $210, the fluctuation rate is +5%. The NAV (net asset value) of BTC3L becomes $200 x (1 + 5% × 3)= $230;
On the second day, the price for one BTC rises from $210 to $220, the fluctuation rate is +4.76%. The NAV of BTC3L becomes $230 × (1 + 4.76% × 3) = $262.84;
In conclusion, the fluctuation rate in these 2 days is ($262.84 - $200) / $200 × 100% = 31.4%, which is greater than 30%.
One-sided market: one way down
In the "one way down" scenario, the loss incurred from trading ETFs is less than from futures trading. Below is how the loss is calculated:
The price of BTC falls by 5% on the first day. The NAV of BTC3L becomes: $200 x (1 - 5% × 3) = $170;
The price falls again on the second day and the fluctuation rate is -5.26%. The NAV of BTC3L becomes $170 x (1 - 5.26% × 3) = $143.17;
The overall fluctuation rate in these 2 days is ($143.17 - $200) / $200 × 100% = -28.4%, which is greater than -30%.
Two-sided market: first up, then down
If the price of BTC first rises, then falls back to the same level, then ETFs do not hold any advantages over perpetual futures.
On the first day, the price for one BTC rises from $200 to $210, the fluctuation rate is +5%. The NAV of BTC3L becomes $200 x (1 + 5% × 3) = $230;
On the second day, the price falls from $210 back to $200, the fluctuation rate is -4.76%. The NAV of BTC3L becomes $230 x (1 - 4.76% × 3)= $197.16;
The overall fluctuation rate in these 2 days is ($197.16 - $200) / $200 × 100% = -1.42%, which is less than 0%.
Two-sided market: first down, then up
Same as the scenario described above, if the price first goes down, then goes up to exactly the same level, ETFs are not an ideal investment.
On the first day, the price of BTC falls by 5%. The NAV of BTC3L becomes $200 x (1 - 5% × 3)= $170;
On the second day, the price rises back from $190 to $200. The fluctuation rate is +5.26%. The NAV of BTC3L becomes $170 x (1 + 5.26% × 3) = $196.83;
The overall fluctuation rate in these 2 days is ($196.83 - $200) / $200 × 100% = -1.59%, which is less than 0%.
Please be warned: ETFs are financial derivatives with high risks. This article should only be considered a brief analysis instead of any investment advice. Users must have a thorough understanding of the products and their risks before trading.
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