How do our Tokens provide short exposure?

In this article we'll provider more colour over how our inverse and leveraged tokens provide short daily exposure to Bitcoin. Make sure you also have a read of our article on rebalancing so you can eventually have an exhaustive understanding of BTCSHORT!

Introduction

This article is a primer on how BTCSHORT works under the hood to provide token holders with short exposure to Bitcoin’s daily performance. As a reminder, BTCSHORT is an ERC20 token which aims to maintain notional exposure to the inverse of Bitcoin’s daily performance. BTCSHORT rebalances at the end of each day — making the BTCSHORT best suited to hold for a day as a hedge against potential daily declines in Bitcoin’s price.

A lot of the aspects of BTCSHORT are automated through the use of our smart contracts which helps provide a frictionless trading experience. As such, market participants do not need to rely on margin trading nor forced to deal with margin calls.

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.

  1. In order to provide short exposure to Bitcoin, we borrow Bitcoin on the backend through our partner lending platforms
  2. If one wants to buy a certain amount of BTCSHORT, she would need to transfer the amount, denominated in USD Coin (USDC) to our Jasper smart contracts
  3. After this, we borrow Bitcoin and immediately sell it on the open market at Bitcoin’s current price
  4. By selling the borrowed Bitcoin we are able to maintain a 2:1 ratio between the amount of USDC we hold and the value, in USDC terms, of the Bitcoin we hold. In the numerator (ie, 2), we have the amount deposited to the smart contract and the amount of Bitcoin borrowed. While on the denominator (ie, 1) we have the number of bitcoin purchased in USDC.
  5. As mentioned, amounts are denominated in the stablecoin USD Coin (USDC). USDC is pegged against the US Dollar, meaning 1 USDC = 1 USD

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:

100 BTCSHORT Tokens = 1 BTC

1 BTC = $10,000

$10,000 = 10,000 USDC

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) during the mint/redeem period of 4:50 PM – 5:01 PM CET. This additional USDC would be added to our smart contract, making its total balance 20,000 USDC (ie, 2:1 ratio). In other words, we’d end up with 20,000 USDC for 1 Bitcoin borrowed at 10,000 USDC. Therefore, 20,000 / 10,000 = 2 (ie, 2:1 ratio).

So how do we calculate BTCSHORT’s token value?

USDC Amount in The Smart Contract: 20,000 USDC

Bitcoin Borrowed: 1 BTC

Current Bitcoin Price: 10,000 USDC

Total Supply: 100 BTCSHORT

Net Token Value: 20,000 - 10,000*1 = 10,000

1 BTCSHORT Value = 10,000/100 = 100 USDC

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.

USDC Amount: 20,000 USDC Bitcoin Borrowed: 1 BTC

Current Bitcoin Price: 8,000 USDC

Total Supply: 100 BTCSHORT

Net Token Value: 20,000 - 8,000*1 = 12,000

However, the ratio is now 2.5 (ie, 20,000 USDC / 8,000 USDC) for 1 BTC borrowed instead of 2 for a 2:1 maintained ratio. As such, on the backend, we’ll borrow 4,000 USDC worth of BTC to get to this ratio. In other words, borrow 0.5 BTC worth USDC.

USDC Amount: 24,000 USDC

Bitcoin Borrowed: 1.5 BTC

Current Bitcoin Price: 8,000 USDC

Total Supply: 100 BTCSHORT

Net Token Value: 24,000 - (8,000*1.5) = 12,000 USDC

BTCSHORT Value = 12,000/100 = 120 USDC

Your 100 BTCSHORT bought at 10,000 USDC is now worth 12,000 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.

USDC Amount: 20,000 USDC

Bitcoin Borrowed: 1 BTC

Current Bitcoin Price: 12,000 USDC

Total Supply: 100 BTCSHORT

We would thus need to decrease the amount of Bitcoin borrowed by $4k (0.33 BTC) in order to get back to that 2:1 ratio.

Net Token Value: 16,000 - (12,000 * 0.66) = 8000 USDC

BTCSHORT Value: 8000/100 = 800 USDC

Your 100 BTCSHORT bought at 10,000 USDC is now worth 8,000 USDC

Conclusion

As the above examples show, our tokens aim to provide you with inverse exposure to the price of Bitcoin on a daily basis. It's important to note that over a period longer than 1 day, your returns will not correlate strictly to the price performance of the underlying crypto. This is primarily due to the effects of compounding.

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.

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