The article discusses the risks of leveraged tokens offered by cryptocurrency exchanges. The product is similar to leveraged exchange-traded funds (ETFs) that offer leveraged returns with respect to a reference asset. However, leveraged tokens do not continuously rebalance to maintain a fixed leverage ratio. Instead, the leverage ratio may swing between 1.25x and 4x, determined by a proprietary algorithm (not known to the investors).
Prof. Leung, who has written a book on leveraged ETFs, warned that "one problem with the absence of regular rebalancing is the product would naturally get more leveraged just as the market is moving against it."
“It’s too opaque,” he said, commenting generally on a retail product structured this way. “An investor is looking at the historical leverage ratio and thinking it should be 2x, but there’s no guarantee the future leverage ratio is going to be two.”
Read the full article on the Bloomberg website.