Understanding How FLI Products Perform

Flexible Leverage Index (FLI) Products

Flexible Leverage Index products are tradable ERC-20 tokens that aim to generate leveraged exposure to the underlying asset.

Today you can use FLI tokens to access double (2x) exposure on a number of popular cryptocurrencies, while greatly reducing the risk and complexity usually associated with leveraged trading. While there are inherent risks associated with using these products, they perform remarkably well in the right circumstances. This post deals with when FLI products will perform at their best and how investors can take advantage of their features.

FLI tokens perform best in a positive market move

FLI tokens are very responsive to momentum. They are designed to amplify the price action of the underlying asset through the use of leverage. Traders can benefit from using FLI tokens when they are confident that there is strong potential for growth in the near future. ETH2x-FLI targets a 2x return on the price change in ETH. It is helpful to look at some real world data to understand how FLI can benefit from momentum in the market. Between March 26th and May 12th 2021, the price of ETH increased by 251%. During the same period, ETH2x-FLI increased by 535%. By investing in FLI during this period, a trader would have experienced a 2.13x premium over holding ETH during that time.

Warning: If you have yet to realize a profit in FLI Tokens you are at risk of mean reversion

Mean Reversion is a theory in finance that suggests that prices will eventually return to their long-run average. When using a leveraged product such as a FLI token, a change in momentum to the downside can be just as powerful as the positive movement shown above. Taking a slightly longer view of the same time period, we can see that the same position taken in ETH2x-FLI lost much of its value in just a few days as the price of ETH returned to the long-run average in May. Investors in FLI who are yet to realize gains should be aware of the impact that a reversion to the mean price of the underlying can have on their holdings.

FLI tokens will avoid liquidation in a negative market move

FLI tokens will perform well when you need to reduce risk by delevering quickly. Holding a standard leveraged position during a downturn can lead to much greater loss of capital than just holding the underlying. If you are unable to provide the extra collateral required, you are at risk of liquidation. FLI tokens help to reduce much of this risk by automatically delevering your position during a price drop in the underlying asset.

To see this process in action, let’s take a closer look at the price drop during May 2021. Between May 16th and May 24th, the price of ETH fell by 48%. During this period, many billions of dollars worth of leveraged positions were liquidated. During the same period, the price of ETH2x-FLI fell by 72% — or about 1.5 times further than the drop in ETH. However, if you held a position in FLI during this time, you would not have been liquidated.

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