How does BTCSHORT work?

In this article we explain how BTCSHORT, our first inverse token, works.

In order to understand how inverse tokens such as BTCSHORT works, it is important to first understand the risks of holding tokens which use leverage and tokens seeking daily leveraged performance (e.g. -1x), as well as being comfortable with actively monitoring your holdings in tokens. This is because BTCSHORT is designed to be held for a period less than or equal to 1 day. These tokens are not suitable for long term holdings. In this post, we exclude all fees and expenses associated with BTCSHORT and holdings of Bitcoin.

Understanding compounding is key to ensuring that you are able to appropriately handle the risks associated with holding BTCSHORT. The token resets (or rebalances) at the end of each day. As such, yesterday’s change in value contributed to the rebalancing at the start of the next day — as BTCSHORT aims to maintain a -1x notional exposure to the daily percentage change in the value of Bitcoin. Because of this, compounding can significantly increase or decrease a token holder’s -1x exposure to Bitcoin if BTCSHORT is held for more than 1 day. We will show three scenarios where this is the case.

Scenario 1 — High Volatility, Stable Bitcoin Price

BTCSHORT will underperform in a volatile market. As mentioned, BTCSHORT tracks -1x the daily performance of Bitcoin. If the price of Bitcoin falls and therefore the token’s value rises on day one and then is followed by a rise in the price of Bitcoin the following day of the same percentage, the loss suffered by the Token will be applied to a larger amount than the gain the previous day. This means the token will have lost value even if the price of Bitcoin ends up being the same after two days. In a similar fashion, If the price of Bitcoin rises and therefore the Token’s value falls on day one and then is followed by a fall in the price of Bitcoin the following day of the same percentage, the gain enjoyed by the Token will be applied to a small amount than the loss of the previous day. This means the token will have lost value even if the price of Bitcoin ends up being the same after two days.

Volatility has a negative effect on token holders who hold the token for longer than a day as the table and graph below shows.

Scenario 2 — Low Volatility, Downtrending Bitcoin Price

If the Bitcoin price is stable but trending in a negative direction, then BTCSHORT’s value will benefit. This is because daily returns of the token are compounded and gains made on one day will benefit from gains made on previous days.

As you see, BTCSHORT outperforms the non-compounding index by 0.18% as compounding benefits inverse tokens in a low volatility market with a consistent trend.

Scenario 3 — Low Volatility, Uptrending Bitcoin Price

If the Bitcoin price is stable but trending in a positive direction, then BTCSHORT’s price will suffer. Losses made on one day will be subsequent losses applied to a smaller amount. This means that compounding will lead to slightly reduced losses than if there were no compounding.

BTCSHORT performs less worse than what it would have done if there was no compounding as we can see by the fact that BTCSHORT falls less over two days than Bitcoin rose in absolute terms. Compounding greatly affects the performance of BTCSHORT over periods longer than one day. This effect is particularly noticeable in volatile markets. As such, BTCSHORT has a holding horizon of less than or equal to one day and holders should consider their holdings at least daily.

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.

Amun Updates

Subscribe to receive the latest token insights.