FTX bull and bear are ERC20 tokens which gives 3x returns on the change in price of the underlying assets. Hence, if the underlying crypto (e.g. Bitcoin or Ethereum) gains or losses by 10% in a day, the bull and bear tokens will gain or lose 30%. FTX is a crypto-derivatives exchange founded by the team at Alameda Research.
The main advantage of holding bull and bear tokens is that these are leveraged tokens with lesser risk of liquidation and avoids payment of funding rates. Moreover, it can be ‘HODL’ed like any other cryptocurrency on a ERC-20 enabled wallet or an exchange. While FTX manages the orders and adjustments of these tokens, the custody of the tokens can be managed independently on any ETH wallet.
However, there is a significant difference between a 3x return/loss on the underlying asset than what happens with the BULL and BEAR tokens, more importantly in the long run. These tokens are adjusted every day, causing the returns to compound, in case of profit or avoid liquidation by gradual sell-off in the cases of loss.
Cryptocurrencies and Exchanges Trading BULLs and BEARs
Currently, the BULL and BEAR tokens are designed for Bitcoin (BULL and BEAR), Ethereum (ETHBULL AND ETHBEAR), EOS (EOSBULL and EOSBEAR), XRP (XRPBULL and XRPBEAR) and Tron (TRXBULL AND TRX BEAR).
These bull and bear tokens are also listed on top exchanges like Gate.io, BitMax, and was recently added on Poloniex with an addition of Tron [TRX] Bulls and Bears as well.
The Tron version of it was launched recently by Poloniex Exchange on 26th March, 2020. It tweeted,
We’re excited to partner with @FTX_Official to bring leveraged tokens to Poloniex! You can now deposit BULL, BEAR, TRXBULL, and TRXBEAR into your Poloniex account. Post-only trading for these assets will open soon
How do FTX Bull and Bear Work?
FTX derivatives exchange manages the orders for the bull and bear tokens. The exchange places perpetual contract orders of 3x size of the amount used to create the tokens. It provides for three options:
- Trading of BULL and BEAR,
- Creating of BULL and Bear, and
- Redemption or settlement of BULL and BEAR.
For creation of BULL. the exchange buys long orders of 3x size of the amount of order for BULLS. Similarly, for BEARS, it places equivalent short orders of 3x size.
‘HEDGE’ ERC20 Tokens
Apart from the BULL and BEAR token, FTX also offers ‘HEDGE’ which enables holders of a particular cryptocurrency to hedge or protect their investments from adverse drops. If traders analyse that the likelihood of a drop is increasing, they can purchase ‘HEDGE’ tokens, which is essentially a 1x short order on a cryptocurrency.
The HEDGE tokens are also re-balanced using the same mechanism for BULLS and BEARS. This corresponds to market moves of roughly 30% for HEDGE tokens or everyday at 2: 00 Hours.
These tokens are ‘re-balanced’ everyday at 2: 00 Hours UTC, or when the price of the underlying asset moves enough to cause a 33% move in BULL or BEAR.
Essentially, the target for re-balancing is to bring back the leverage to 3X. For e.g., let’s say the total capital BTCBULLS is $100,000 for 50 BTC priced at $6,000. On the next day, at the time of re-balancing, let’s’ say the price of Bitcoin $6,100. Hence, the leverage has now fallen from 3x (total worth of $305,000) to 2.95 as the position moves to 105,000 now. Now, the engine will purchase Bitcoins worth $15,000 (+2.46 BTC) to readjust the position back to 3x.
These tokens are designed to avoid liquidation during highly volatility moves in prices. Hence, in cases of losses on a particular day, the position of BULL is reduced.
Note, that for BULLS, let’s say the price of the cryptocurrency drops by 33% in a day, this would effectively liquidate the tokens. Hence, these are re-balanced at the first drop of 11.15% for BULL tokens, and 6.7% for BEAR tokens or when the leverage increases from 3X to 4X.
In case of profit or favorable moves in the price in relation to the investors’ position, the readjustment adds on to the tokens which is equivalent to compounding. On the contrary, in case of losses, it reduces the position at the time of re-balancing.
Every day each leverage token reinvests profits if it makes money. If it lost money, it sells off some of its position, reducing its leverage back to 3x in order to avoid liquidation risk.
Understanding Compounding and the Returns on these Tokens
Binance which had earlier listed these tokens in January, 2020, decides to de-list these tokens on the account of complexity. Changpeng Zhao, the CEO of Binance notes,
They are not designed for long term holding. They devalue over time when markets (underlying assets) fluctuate back and forth. The main reason for delisting is that too many users don’t understand them.
The re-balancing mechanism as explained above yields disproportionate results that might be complex to understand for most investors. The rise or reductions on a new price is different from moving up or down 30% from the original price.
In case of profit, the returns keep on ‘compounding’ daily, as the position size is increased due to re-balancing. Similarly, in case of downtrend, the position size keeps on decreasing with the daily loss.
However, the markets rarely go follow a unidirectional path, i.e. there are always corrections and bounces even during well established bullish or bearish trends. This is when the leveraged tokens become riskier than margin orders.
In margin orders, the break-even price, liquidation price, and targets are the few levels which the traders watch as their position remains intact. However, in case of FTX leveraged tokens, the position size changes everyday, which changes the returns completely.
Hence, even if the bull or bear tokens reap hefty rewards on day 1, the correction or bounce on the next potentially puts the position at a higher risk, than before.
The first BULL and BEAR token was based on Bitcoin as the underlying asset, it was released in March 2019 when it began trading at a price of $6250. It recorded a high above $146,000 on 26th, when BTC reached the peak at $13,800 during the 2019 bull market.
One can notice that it is not simply a movement of 3X in price w.r.t to the underlying asset. This is a complex independent market that yields massive swings during trending markets.
Furthermore, the price of the token is also dependent on the amount of money (in USD) used to create the tokens and the underlying leverage of cryptocurrencies. The liquidity and price of the BEAR tokens are particularly as the markets are usually in Contango.
During times of uncertainty and volatility, these tokens under-perform w.r.t. margin orders. However, FTX bull or bear tokens have considerable advantage during trending markets. This is visible during the last few days of the bull market when the price of BULL (Bitcoin) topped above $146,000.
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