> For the complete documentation index, see [llms.txt](https://docs.bounce.tech/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.bounce.tech/basics/how-leveraged-tokens-work/effects-of-rebalancing.md).

# Effects of rebalancing

Unlike conventional perpetual futures, leveraged tokens rebalance their leverage factor which leads to a number of notable implications.

## Directional de-/leveraging <a href="#directional-de-leveraging" id="directional-de-leveraging"></a>

Leveraged tokens can offer amplified returns and loss mitigation for one-directional price movements. In conventional perpetual futures contracts, e.g., a 3x long position, the leverage decreases as the underlying asset appreciates, and conversely, it increases as the asset depreciates. Rebalancing counteracts this effect. After an underlying asset appreciation, leveraged tokens can exhibit relatively higher leverage than perpetual futures, thereby enhancing the Return on Investment (ROI). Conversely, if the underlying asset depreciates, rebalancing the leverage alleviates the impact of further asset depreciation - a characteristic distinct from perpetual futures.

The following simplified calculation illustrates how rebalancing works during one-directional movements:

{% hint style="info" %}
Note that this is not Bounce-specific but merely illustrates a potential effect of rebalancing.
{% endhint %}

*PF = Perpetual future*

*LT = Leveraged token*

*UA = Underlying asset*

| Form of leverage | T1      | T2                   | ROI (T2) |
| ---------------- | ------- | -------------------- | -------- |
| 2x Long PF       | UA +10% | UA +10%              | 42%      |
| 2x Long LT       | UA +10% | Rebalancing, UA +10% | 44%      |

## Volatility decay <a href="#volatility-decay" id="volatility-decay"></a>

In contrast to the amplified returns and loss mitigation seen with one-directional movements, volatility introduces an opposing effect, leading to volatility decay. For instance, following the rebalancing of a long position due to a depreciation in the underlying asset, the leverage factor will be lower in comparison to a position that did not undergo rebalancing. Consequently, a subsequent asset appreciation would lead to a comparatively lower increase in ROI.

The following simplified calculation illustrates the impact of rebalancing due to volatility:

{% hint style="info" %}
Note that this is not Bounce-specific but merely illustrates a potential effect of rebalancing.
{% endhint %}

| Form of leverage | T1      | T2                   | ROI (T2) |
| ---------------- | ------- | -------------------- | -------- |
| 2x Long PF       | UA -10% | UA +10%              | -2%      |
| 2x Long LT       | UA -10% | Rebalancing, UA +10% | -4%      |


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