- Learn how to create a successful leveraged exposure to your market of choice with Wirex Multiply
- Earn higher rewards with higher risk, with a clear potential benefit for the investor
- Discover the costs of leverage and how to invest in the product
Wirex ‘Multiply’ is a product that offers its investors a leveraged exposure to the market pair of their choice. With the ability to borrow recursively and invest the total borrowed amounts, you can earn higher rewards with higher risk.
What is ‘leverage’?
In the physical world, an 80kg individual could theoretically lift an 800kg object with a 110 metre beam, and a fulcrum set between the individual and the object, 10 metres away from the object. Hence, the ability to lift 800kg with a weight of 80kg consists of a leverage of 10:1.
In financial markets, investors create a leveraged exposure by borrowing money to invest more than they can afford. In other words, the initial amount they own and risk is a fraction of the total capital invested. Effectively, this initial amount is posted as collateral, and the ratio of the total capital invested over the initial amount’s value is the leverage ‘multiplier’.
In the case of a leverage of 2:1 (multiplier = 2), the initial collateral would be worth half of the total capital invested. For a leverage of 50:1 (multiplier = 50), the initial collateral would be worth 2% of the total capital invested.
Creating a leveraged exposure has a clear potential benefit for the investor. For instance, a ‘multiply’ position on BTC/USDT, with a multiplier of 20, profits greatly from a BTC/USDT price increase. If the price increases by 1%, the unrealised gain for the user will be at 20% (minus borrowing costs). The investor can then close the position to try to realise (e.g. lock) this profit.
By contrast, if the price decreases by 1%, the unrealised loss will be at 20% (plus borrowing costs). In this case, the investor can still close the position to try to avoid further losses.
What is ‘recursive borrowing’?
Behind the concept of high leverage also lies the concept of ‘recursive borrowing’. Let’s go through an example to illustrate the concept:
If an investor posts 24,000 USDT as collateral, a loan-to-value of 95% would let him borrow up to 95% of this amount in BTC: if the BTC/USDT price is at USDT 24,000, then the maximum borrowed amount is exactly 0.95 BTC. The investor can sell the borrowed BTC for 0.95*24,000 = 22,800 USDT, post them again as collateral to borrow more BTC. The same process can be repeated 26 times to borrow a total of 14 BTC, or equivalently, a total exposure of 15 BTC (14 BTC borrowed + an initial collateral of 1 BTC).
It is custom in the crypto sector to offer ‘over-collateralised’ loans: the collateral value must exceed the value of the loan. Therefore, the loan-to-value ratio (LTV) should remain below a maximum LTV, and this maximum LTV is always strictly below 1.
The LTV will vary with the value of the collateral and loan assets. In the case of the BTC/USDT pair described above, a BTC/USDT price increase will dangerously increase the LTV. In fact:
- If the price increases by 1%: the unrealised loss will be 1%*14*24,000 = 3,360 USDT. Given that the initial collateral posted (24,000 USDT) largely covers this loss, the position will remain open.
- If the price increases by 6.43%: the unrealized loss will be 6.43%*14*24,000 = 21,604 USDT, which represents already 90% of the initial collateral posted. In this case, the risk for the unrealised loss to exceed the initial collateral value is high enough to trigger a ‘liquidation’ event. The total collateral (USDT) will be sold, and the proceeds used to close the debt (buy BTC).
In an extreme case scenario, proceeds could fail to cover the debt. This could happen during a ‘panic bull’ market, where the price of BTC/USDT soars above 6.66% before the BTC can be bought. The position becomes ‘underfunded’ such that the effective ‘lender’ (Wirex) has a net realised loss after closing the position. In the context of the ‘Multiply’ product, Wirex would cover an exceptional loss such as this.
What are the costs for using Multiply?
Creating a leveraged exposure has costs for the investor. which are structured with two components:
- The first cost component is the ‘rollover fee’. It is the borrowing cost that is charged on the borrowed amount every hour. In the BTC/USDT case, the rollover fee is at 0.003% such that 0.003%*14 = 0.00042 BTCs are charged every hour.
- The second cost component is the risk of liquidation. It is the risk for the investor to lose the full initial amount following an adverse market movement. A high risk position can yield higher positive (or negative) returns.
If the sum of the total rollover fee charges, and the unrealised loss, exceeds the initial amount, the position will be closed by Wirex.
Tips for how to invest in the ‘multiply’ product ?
Don’t hold a position for too long.
The rollover fee effectively shortens the ‘Multiply’ life. Assuming the price is constant with a 1:20 leverage and a 0.005% fee charged every hour. The lifetime of the product is:
lifetime in days = 1.0 * (1 - liquidationBuffer) / rolloverFee / Leverage / 24
= 1.0 * (1-0.10) / 0.00005 / 20 / 24 = 37.5 days
1% of the capital invested is consumed every 0.375 days = 9 hours, which deteriorates the debt position, and reduces the maximum profit level by 1%/20 = 5bps.
If the price movement’s direction aligns with the Multiply direction (e.g. ‘UP’), the product’s life can double or almost triple.
Control your loss aversion and overconfidence bias.
Avoid resetting your Stop Loss level hoping for the market to recover, and avoid resetting your Take Profit hoping to lock more gains.
A good trader sets the Take Profit and Stop Loss levels before opening the position, and after careful analysis. Above all, good traders respect their initially set levels. They set Stop Loss levels they are comfortable with.
To read a step-by-step on how to create a Multiply, read more here.
DISCLAIMER: The content of this publication should not be construed as an express or implied promise, guarantee or implication by Wirex that clients will profit or that losses in connection can be limited from reliance on any information. The content is purely educational and informative, not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice and should not be relied on for those purposes. The author and Wirex are not responsible for any loss arising from any investment based on any perceived recommendation, forecast, or other information contained here.
None of the information in this article constitutes an offer (or solicitation of an offer) to buy or sell any currency (whether cryptocurrency or fiat) or product, make any investment or participate in any trading strategy. Crypto products, including Wirex Multiply, can be risky for users. The value of your assets may significantly and lead to a total loss, and there may be no regulatory recourse for any loss from such transactions depending on your location. Please do your research thoroughly. Subject to location of the user, the Terms and Conditions and Privacy Policy.