As a responsible crypto investor, you are probably looking for ways to diversify your token portfolio. You can start doing so with exchange-traded products (ETPs). ETPs allow you to gain exposure to various tokens on the Huobi Global ETP list without the hassle of actually owning them, so you can concentrate on trading without storing private keys, worrying about DeFi safety, or managing numerous 錢包.
In addition, Huobi Global ETP trading pairs contain leverage that can multiply your profits if your trade is successful, allowing you to concentrate on making profits while also safely diversifying your portfolio.
Intrigued? Keep reading to learn how ETP works and how you can benefit from some exposure to this product. You can also read our lesson on how to open and close your first ETP order.
What to know before engaging in ETP trading
The purpose of an ETP is to track the value of its underlying asset. It can be a company share or a ‘basket’ of assets containing financial instruments, securities, or an index. For example, it can track a specific stock or an industry, or an index like the S&P 500. As a result, ETP prices don’t remain still. Instead, they constantly fluctuate according to the price movements of their underlying assets.
While ETPs are traded in a similar way to company shares, how their price is derived varies greatly. Typically, companies issue a fixed number of shares to be traded at a variable price determined by supply and demand. However, unlike shares, ETPs can be created and redeemed to meet demand, which means the number of ETP units issued is variable and priced in accordance with underlying assets.
Similarly, when you invest in ETPs in crypto, you receive a portion of the underlying shares instead of the actual tokens. In other words, you are trading only the value of the basket and don’t have ownership of the token, which means you can’t transfer the tokens out of the exchange or trade them for other pairs, like ETH/BTC.
How to create and redeem new ETPs
Huobi Global functions as an ETP issuer investors can engage with directly to create and redeem securities. If you wish to create ETP securities due to growing market demand, you must deliver the underlying reference asset the ETP is designed to track to the ETP provider, which is Huobi Global in this case. On the platform, this is the ‘subscription’ process.
The redemption process is the opposite. When investors ‘withdraw’ ETP securities, the ETP provider will return either the underlying reference asset or its equivalent value in USDT to the investor in exchange for the securities. These returned securities will then be canceled, thus lowering the supply.
Because ETPs are created in exchange for underlying assets or USDT, they are able to source liquidity from the assets being tracked. So as long as these are primarily liquid, the creation and redemption process will make token shares readily available for purchase or redemption by investors.
On Huobi Global, you can also participate in the price movements and trade ETPs as regular tokens without creating or redeeming new shares. This is why there are 2 options in the Huobi Global ETP trading interface order box, ‘Exchange’ and ‘Subscription and redemption’. In short, you can either create or redeem shares or just trade their prices.
How ETPs derive their prices
On Huobi Global, each ETP trading pair has a basket of margin positions that continually define their prices. For example, BTC*3 (see below) refers to the BTC/USDT pair being purchased thrice.
More precisely, the pair contains 3 different margin positions — when you buy one BTC*3/USDT contract, the system will add 3 BTC/USDT margin positions. As a result, the profit is tripled if the price rises.
ETPs are traded like other tokens. They have prices that move throughout the day and can be bought and sold anytime, without time constraints.
As you may have gathered from the image above, the prices of ETP pairs differ drastically from their real mirroring pairs. For example, the price of BTC could be in in the tens of thousands but the long BTC/USDT ETP pair has a set price of 10 USDT. Lower prices like this one allow you to invest more easily.
Let’s demonstrate with 3 simple examples how the ETP pairs function in the case of the BTC/USDT pair:
1. If you want to go long on BTC and profit from the growth of the asset price, you will have to buy BTC*3 contracts, which means you will go long on BTC with 3x leverage. If the price of the underlying asset (BTC) increases by 1%, the net value of the product will increase by 3%.
2. If you want to go short on BTC and profit from the decline of the asset price, you will have to buy BTC*(-3) contracts, which means you will go short on BTC with 3x leverage. If the price of the underlying asset drops by 1%, the net value of the product will increase by 3%.
3. If you want to go short on BTC and profit from the decline of the assets price, without the leverage, you will have to buy BTC*(-1) contracts, which means you will go short on BTC with 1x leverage. If the price of the underlying asset falls by 1%, the net value of the product rises by 1%.
Why choose ETPs?
At the beginning of this lesson, we mentioned that ETPs were well-suited to diversification strategies and amplifying profits. But how else can trading ETPs benefit you?
Firstly, it is an easy product to use. You can use it as you would in spot trading, with the same limit, market, stop-limit and trigger orders.
Secondly, you need not pay for the collateralized assets to achieve the effects of leveraged trading. You don’t have to take loans or worry about loan repayments or interest rates.
Lastly, there is no risk of liquidation due to the daily position adjustment, an automated system that increases profits and reduces losses on all ETP positions. The system ensures that underlying token positions are always at the intended leverage and have no expiration date.
Nevertheless, do note that there is always a risk the net value of your investment can dip close to zero.