Risk warning about CoinW ETF products

In order to improve your trading experience, the following risk warnings are specially provided for ETF products in the volatile market. Please pay attention to the market trend and risks, and conduct position operations in a timely manner to control risks:

[A]. Explanation of basic problems

Before understanding the product risk warnings of ETFs, it is necessary to understand the following basic information of ETF products:

1. What is net worth and what is the relationship between net worth and price?

(1) The relationship between net worth and underlying assets

• Equity = Basket Position * Underlying Asset Price + Basket Loan
• Basket Position: The number of underlying assets held by each ETF
• Basket of borrowed coins: the number of borrowed coins held by each ETF

For example: BTC3L, if the basket asset is (basket position 3BTC, basket loan -200U), and the underlying asset BTC/USDT price is 100U, then the net value = 3*100–200=100U. Therefore, the net value is mainly affected by the number of assets in the basket and the price of the underlying assets.

(2) The relationship between net worth and price

The price of an ETF mainly fluctuates around the net worth of the ETF product.

2. What is ETF rebalancing and when will it be rebalanced?

ETFs are divided into two types: regular rebalancing and irregular rebalancing

• Regular position adjustment: means that the platform will rebalance the position at a fixed time every day to ensure that the ETF is at the predetermined multiple leverage at the beginning of each day;
• Irregular position adjustment: refers to the temporary position adjustment when the actual leverage multiple of the ETF exceeds a certain level during the day, and the position adjustment will be at the predetermined multiple leverage after the adjustment.

Taking BTC3L/USDT as an example, the system will increase profits and reduce losses for the spot leveraged positions corresponding to the bottom layer of the ETF through daily position adjustment. This ensures that the underlying asset position corresponding to the user’s BTC3L/USDT is in a leveraged state of 3 times.

3. What is the actual leverage of an ETF?

ETF actual leverage ratio = basket position * underlying asset price / net value

Equity = Basket Position * Underlying Asset Price + Basket Loan

Therefore, before the ETF product performs timed or irregular position rebalancing on the day, the actual leverage multiple on that day will fluctuate with the changes in the underlying asset price.

Since the actual leverage multiple of ETF products will fluctuate with the underlying asset price at the agreed multiple leverage, the user’s actual income from trading ETF products is calculated based on the actual leverage multiple when the user trades.

For example, for BTC3L, set the basket asset as (basket position 3BTC, basket loan -200U), and the underlying asset BTC/USDT price is 100U, then the net value = 3*100–200=100U. Actual leverage ratio of ETF=3*100/100=3

[B] What are the risks of ETFs and in which circumstances will they arise

Under the volatile market, the ETF first falls and then rises within the day, or when the situation first rises and then falls;

If the rise and fall of the underlying asset reaches the trigger line of the irregular position adjustment rule;

After the system performs the irregular position adjustment of ETF products and reduces the underlying assets, the net value of the ETF will be worn down, resulting in a decline in the net value of the ETF. At that time, the net value of ETF products may occur in the following situations:

1. There is a big gap between the net value of an ETF and the multiples of the underlying assets, which is not the relationship between the agreed leverage multiples

This situation mostly occurs when the ETF product has completed the irregular position adjustment, the price of the underlying asset of the ETF has just begun to retrace/the recovery rate is small, and the net value of the ETF has just begun to increase.

For example: the BTC3S product held by the user at 0:00, the BTC first rose by 11.11% and then fell by 9.99% on the same day, although the BTC price did not change at this time; but because the BTC3S underlying asset BTC rose to 11.11%, the net value of BTC3S fell. 33.33% of the time, the system was triggered to adjust the position from time to time to reduce the position of the basket, and the net value has been worn out;

Therefore, when the price of BTC has been corrected and there is no change, the net value of BTC3S only increased by 29.99% due to wear and tear, and still decreased by 13.33% compared with 0 points.

As a result, under the volatile market, the price of BTC did not change, and the net value of BTC3S fell by 13.33%

2. The net value of products in both long and short ETF directions has risen or fallen at the same time

This situation mostly occurs when the ETF product has been readjusted from time to time, and the underlying asset price of the ETF continues to pull back/increase by a large margin, and the net value of the ETF increases steadily.

For example: the BTC3S product held by the user at 0:00, when BTC first rose by 11.11% and then fell by 15% in one day, although the BTC price fell by 5.55% at this time; but because the BTC3S underlying asset BTC rose to 11.11%, When the net value of BTC3S fell by 33.33%, the position adjustment was triggered from time to time, and the system carried out the operation to reduce the position of the ETF basket, which has caused the wear and tear of the net value;

Therefore, when the price of BTC fell by 15%, the net value of BTC3S increased by 45.00%, which was still 3.33% lower than that of 0.

As a result, under the volatile market, BTC fell by 5.55%, the net value of BTC3L fell by 16.66%, and the net value of BTC3S fell by 3.33%, and the two products of ETF long and short fell at the same time.

The numerical calculation is as follows:

3. Position risk of price deviation from equity

The price of ETF products fluctuates around the size of the net value. When the market fluctuates greatly, there will be a large deviation between the price and the net value of ETF products. For users who already hold ETF products, there is a risk that the assets of the ETF products will be damaged.

4. Equity wear

ETF products will experience net value wear and tear under volatile market conditions.

If the rise and fall of BTC in 4 days are 5%, -5%, 5%, and -5% respectively, the cumulative rise and fall is -0.5%, and the cumulative rise and fall of the net value of BTC*3 is -4.45%, which is higher than -0.5%*3=-1.5%. Therefore, under volatile market conditions, ETF products may experience net value wear and tear.

5. Associated liquidity and pricing risks

Due to the centralized creation and market liquidity of ETF products, CoinW will strive to provide sufficient market liquidity to ensure that the prices of ETF products are within a reasonable range. CoinW will take reasonable measures, including but not limited to capital injection, creating more ETF products and selling ETF products in the secondary market, splitting or merging ETF products to minimize the above risks.

[C]. Risk Warning of ETF Products

ETFs are not long-term investments, and investors with long-term investment or intention to hold ETFs need to take your own risk. Due to inherent market risks, fees, slippage, rebalancing algorithms and any unknown risks with the ETF, the net worth of the ETF may go to zero and the product goes offline. ETF products are more suitable for unilateral market conditions. In the volatile market, the net value will be worn out. Please pay attention to the market trend and announcement information, control your positions in a timely manner, and hold them carefully.

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