Gate ETF Leveraged Token Guide: Mastering Automated Rebalancing and Rebalancing Trading Tools

As of February 6, according to the latest data from Gate, Gate’s ETF products achieved approximately $5 billion in trading volume within 30 days, covering 256 tokens.

This trading enthusiasm is no accident; it stems from the core advantages of leveraged token product design: automatic rebalancing and rebalancing mechanisms, allowing users to enjoy leveraged amplified returns without worrying about forced liquidation risks in traditional leveraged trading.

Product Fundamentals

To understand how leveraged tokens operate, it’s essential to first grasp their basic structure. The name of leveraged tokens directly reveals their core attributes. They are typically composed of three parts: “underlying asset,” “target leverage multiple,” and “direction.”

For example, BTC3L represents a token that is 3x long Bitcoin, while ETH5S is a 5x short Ethereum token.

Essentially, leveraged tokens are a type of fund product that uses financial derivatives such as perpetual contracts to track and “replicate” the price performance of the underlying asset, magnified by a specific multiple.

When users purchase BTC3L, they do not directly hold Bitcoin spot; instead, they hold a fund share, with the fund manager establishing and maintaining the corresponding leveraged derivative positions in the derivatives market.

The most notable difference from traditional leveraged trading is that users do not need to manage collateral, margin, or worry about liquidation risks. They can buy and sell leveraged tokens just like regular spot tokens, greatly lowering the barriers and complexity of using leverage.

Gate currently offers leveraged tokens for several mainstream cryptocurrencies, including Bitcoin (BTC), Ethereum (ETH), Solana (SOL), and Dogecoin (DOGE), covering the most significant assets in the market.

02 Core Operation

The reason leveraged tokens can stably provide targeted leverage exposure lies in a sophisticated “automatic rebalancing and rebalancing” system. This mechanism ensures that, regardless of market fluctuations, the actual leverage ratio of the token is pulled back to the preset target level.

The Necessity of Rebalancing

When the price of the underlying asset fluctuates, the actual leverage multiple of the contract position behind the leveraged token will deviate from the target value.

For example, suppose BTC3L (3x long Bitcoin) has an initial net asset value of 100 USDT, corresponding to a 300 USDT contract position (leverage of 3x). If Bitcoin’s price rises by 5%, the contract value increases by 15% to 345 USDT, and the token’s net asset value rises to 115 USDT.

At this point, the actual leverage drops to 2.74x (315 / 115), deviating from the 3x target.

To maintain the target leverage, the fund manager must perform “rebalancing”—adding 30 USDT worth of contracts to bring the total position back to 345 USDT (115 × 3), restoring the 3x leverage. This process is called rebalancing.

Rules Triggering Rebalancing

Gate’s rebalancing mechanism is highly systematic, mainly divided into two types: scheduled rebalancing and unscheduled rebalancing.

At 0:00 (UTC+8) daily, the system performs scheduled rebalancing. However, rebalancing is not executed mechanically every time. For 3x leverage tokens, rebalancing occurs only when the actual leverage exceeds a specific range (e.g., for 3x long tokens, outside 2.25X–4.125X), or when the underlying asset’s daily price change exceeds 1%.

More critically, unscheduled rebalancing automatically triggers during sharp market volatility. When price swings cause the actual leverage to deviate from the target range, the system intervenes immediately, “automatically pulling back” the leverage multiple to the target level.

This design ensures that even in extreme market conditions, the product can respond swiftly, avoiding excessive risk accumulation. For products with 5x leverage, the thresholds and frequency for rebalancing are higher to accommodate greater volatility sensitivity.

Advantages and Risks

The automatic rebalancing mechanism offers unique advantages for leveraged tokens but also introduces risks that must be acknowledged. Understanding this duality is essential for making informed trading decisions.

Advantages: Simplification and Risk Control

For users, the most direct benefit is operational simplicity and reduced risk. You don’t need to open margin accounts, calculate collateral ratios, or constantly monitor liquidation prices.

Buying leveraged tokens is akin to hiring a 24-hour automated risk management manager. It strictly follows rules, automatically increasing positions when the market is favorable (generating unrealized gains) to amplify profits, and reducing positions when unfavorable to control losses.

This mechanism effectively embeds a dynamic stop-loss and trend-following system, preventing the risk of forced liquidation due to momentary oversight in traditional leverage trading, making the trading experience smoother and more controllable.

Core Risk: Volatility Decay

The main risk stems from the characteristics of the rebalancing mechanism itself. In highly volatile markets, automatic rebalancing can lead to “volatility decay.”

For example, suppose Bitcoin first rises by 10%, then falls by 10%, ending with a 1% decline overall. A 3x leveraged token tracking this would initially rise 30%, then fall 30%, resulting in a net value decrease of about 9%. This erosion is especially pronounced in markets with no clear direction and frequent swings.

Therefore, leveraged tokens are designed as short-term trend trading tools, not long-term investment holdings. Holding them long-term can significantly magnify decay effects, potentially leading to substantial losses.

Another real-world example is that some investors found that when LINK’s price oscillated and finally increased by about 13%, their holdings of 3x short LINK leveraged tokens lost over 80% of their value. This dramatically illustrates the potential consequences of holding the wrong leverage product at the wrong market phase.

Practical Guide

Getting started with trading leveraged tokens on Gate is straightforward. First, log into your Gate account, then navigate to the ETF / leveraged token trading section.

When selecting specific tokens, you’ll see popular trading pairs like ETH5S, ETH5L, DOGE5L, etc., which are currently active.

In the trading interface, you can place orders just like any spot trade. For example, search for “BTC3L” or “BTC5S,” enter the amount you want to buy, and submit the order. All complex underlying position management, including the daily 0.1% management fee, is automatically handled by the system.

A practical strategy for traders is to use leveraged tokens during markets with clear directional trends. Strong trending markets allow the power of compounding to fully unleash, magnifying gains. Conversely, in sideways or highly volatile markets, caution is advised, or consider suspending the use of such products.

For risk management, the most important thing is to set clear entry and exit strategies and strictly adhere to them. Never trade these high-volatility products impulsively without a plan.

Potential Risks

Leveraged tokens magnify the price fluctuations of the underlying assets through derivatives, meaning both gains and losses are amplified proportionally.

If the underlying asset’s price drops by 10%, the net value of a 3x leveraged token will decline by about 30%, and a 5x leveraged token by about 50%.

Gate explicitly states that due to the rebalancing mechanism and holding costs, leveraged tokens are “not suitable for medium- to long-term investment.” The longer the holding period, the more significant the capital erosion caused by market volatility.

For example, market observations show that many leveraged tokens, even after the underlying asset’s price experiences oscillations and returns to the original level, often cannot recover their initial value, sometimes shrinking by over 70%. This phenomenon exemplifies the typical risk of long-term holding.

Therefore, these products are most suitable for professional traders or risk-aware investors who can closely monitor the market and engage in short-term operations, aiming to capture trends or hedge risks.

Product Comparison

Finally, let’s briefly compare Gate’s ETF leveraged tokens with another mainstream product in the market to better understand their characteristics. The table below summarizes key differences:

Choosing the right product depends entirely on your investment goals, risk appetite, and management capacity.

Future Outlook

When users trade ETH5L on Gate, they will find the trading interface almost identical to regular spot trading, but behind the scenes, complex algorithms are calculating every second. This subtle tension exists between the calm trading experience and the dynamic underlying computations.

This tension transforms leverage from a high-risk tool into a strategic component that ordinary traders can use more prudently.