Take Luna for example：
The spot trading price of Luna has almost decreased 50% within the last 24 hours, and we may assume that the price of Luna1D5S will increase by 5*50%=250%, but the actual situation is just on the contrary:
The answer to the question above is that the price is also affected by the loss occurred in the value of Luna1D5S caused by the huge fluctuations during the process of rebalance.
When Luna’s spot trading price decreased all the way from 51 to 27 consecutively, the price of Luna1D5S increased from 5 to as high as 70, with a range of increase of 1300%, which far exceeded (51-27) / 51*5 = 235%, and this is due to the fact that during the process of rebalance, the system will continuously invest the profit generated by users into the product repeatedly for the exponential growth of profit rate. However, during the process of rebalance, the pegged price will be changed constantly as well, which means that when the spot trading price reaches 27, the pegged price of Luna1D5S will also be somewhere around 27, but then Luna’s spot trading price has rebounded from 27 to 40, with a range of increase of 48%. Under the situation mentioned above, theoretically, the loss of Luna1D5S will reach 5*48%=240%. However, considering the fact that no forced liquidation will be conducted for ETF products, the system will still ensure that the net value of Luna1D5S held by users to be greater than 0 through repeated processes of rebalance and position adjustments, but the net value of the product may infinitely approach to 0. Hence, when the spot trading price of Luna increases from 27 to 40, the net value of Luna1D5S will then plummet from 70 to 0.01 immediately.
Hence, despite the fact that the spot trading price of Luna has declined from 51 to 40 at this stage, due to the repeated rebalance processes occurred and the constant changes of the pegged price, the net value of Luna1D5S will decline from 5 to 0.01 instead of the expected increase.
Hence, we may reach the conclusion that under the market trend of any consecutive unilateral quotation (consecutively increase or decrease without huge fluctuations), the profit of ETF products will continue to duplicate, which will produce huge profits that far exceeds actual expectations. However, in case that certain huge fluctuations occur to any token, for example, even if the spot trading price of the token rebounds for a while by increasing 10% or even more than 50% after a huge decline of 50%, the short product of the token will still generate huge losses.
We hope that when purchasing our ETF products, all our users will be able to understand the detailed process and mechanisms behind the products for the avoidance of any expected losses.
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