Leverage is a powerful trading tool that allows traders to profit from borrowed capital. It can help investors optimize returns even on a very little price change, increase their assets rapidly, and increase their exposure to their relevant market. But it is essential to know that while you stand to earn an inflated profit as the market prices go your way, you also suffer intensified losses when prices move against you.
WHAT ARE LEVERAGED TOKENS?
Leverage tokens allow crypto traders to gain exposure to leveraged trading without dealing with more complex aspects of trading like margin and liquidation. This makes trading leveraged tokens a simplified way to gain leveraged exposure to cryptocurrency assets. These tokens offer variable and fixed leverage, and they are not for holding. They are quick-fire products. Use them and dispose of them as fast as you can.
Another unique attribute of leveraged tokens is that they rebalance to maintain the target leverage by increasing or decreasing their positions. Each exchange has its method of rebalancing leveraged tokens. Let us now consider the top three platforms that offer leveraged tokens.
WHERE CAN YOU TRADE LEVERAGED TOKENS
The Binance Leveraged Tokens (BLVTs) are tokenized versions of leveraged futures positions. It supports variable target leverage from 1.5x to 3x so that potential gains can be maximized in times of price appreciation, and liquidation risks can be reduced during periods of price declines.
BTCUP, BTCDOWN, BCHUP, and BCHDOWN are some examples of BLVTs. Using BTCUP, you can maximize leveraged gains of 1.5x to 3x when Bitcoin rises. When the value of Bitcoin increases by 1%, the 3x BTCUP increases by 3%, and the BTCDOWN allows you to generate leveraged gains between 1.5x and 3x when the value of Bitcoin decreases.
Advantages of BLVTs
- 👉 Variable leverage – With variable target leverage from 1.5x to 3x, BLVTs reduce the effect of volatility drag. Sideways markets are less impacted by BLVTs, and pricing moves in one direction tends to strengthen them.
- 👉 Liquidity – A fair price will be available for BLVT tokens because Binance will be the sole provider of liquidity and issuer of the tokens. If the supply runs out, the Binance exchange will inject capital, create more orders, and sell more tokens on the open market. With this method, users will transact their tokens efficiently and receive their orders reasonably.
- 👉 Rebalancing – Unlike the other Leveraged Tokens that rebalance daily, BLVTs are not forced to rebalance unless extreme losses. It will only rebalance the positions needed to maximise profits on upswings to avoid liquidation. Thus, ‘normal’ market fluctuations will not result in token rebalance, and the underlying asset value will stay correlated.
- 👉 Low fees – Compared with other existing leveraged tokens, Binance Leveraged Tokens are cheaper. As a result, BLVTs are unlike any other existing token, charging a low daily management fee of only 0.01%, with an annualised cost of only 3.5%.
FTX was the first exchange that introduced the concept of leveraged tokens. FTX offers leverage up to 3x. For every single future on FTX, there are four leveraged tokens: HEDGE (-1x), HALF, BULL (+3x), and BEAR (-3x). FTX rebalances each day at 00:02:00 UTC to help manage risk. It also rebalances intra-day if they become 4x leveraged to avoid liquidation risk. Other exchanges like Gopax, BitMax, and others listed FTX leveraged tokens on their platform.
How to Buy/Sell Leveraged Tokens on FTX?
There are three ways to Buy/Sell leveraged tokens on FTX.
- 👉 Spot Market – The easiest and recommended way to trade leveraged tokens it’s on the spot market. You can, for example, buy or sell back ETHBULL on the ETHBULL/USD spot market. By selecting the name of the market on the leveraged token market page, you can find the spot market for a leveraged token; or you can choose the underlying future on the top bar and then click on the spot market name.
- 👉 Convert – The ‘CONVERT’ function is also available on the Wallet page for buying or selling leveraged tokens. In a dialogue box that appears as soon as you click ‘CONVERT’ on the right-hand side of the screen, you will find a way to quickly convert any of your FTX coins into the leveraged token.
- 👉 Issuance/Redemption – Unless you have reviewed the complete documentation on leveraged tokens, we do not recommend issuing and redeeming. When you issue or redeem leveraged tokens, the market will impact your price, and you won’t know what you’ll get until after you’ve done it.
Please read our full review of FTX leveraged tokens.
The rebalancing mechanism of the Pionex Leveraged Tokens is optimized to include both fixed and variable leverage. Leveraged Tokens are rebalanced each time the spot price changes by 10% and at 00:02 a.m.
Advantages of Pionex Leveraged Tokens
- Pionex avoids liquidation risk, more beginner-friendly.
- Margin Trading: Earn more and lose less
- Adapt Grid Trading and other trading tools to reduce volatility drag.
FEATURES OF LEVERAGED TOKENS
- 👉 Rebalancing – Rebalancing increases and decreases the exposure to maintain the target leverage and prevent liquidations. Many tokens rebalance every day; a particular time is fixed to buy or sell to increase or decrease the leverage. Also, tokens can rebalance if there is a change in the market price depending on the exchanges automatically.
- 👉 Short-term Trading – Leveraged tokens aren’t for long term trading. You buy and sell them quickly.
- 👉 Trading Fee – For you to trade on leveraged tokens, you have to pay some certain fee such as funding fee, daily management fee, which varies on different exchanges
ADVANTAGES OF LEVERAGED TOKENS
- 👉 Higher Profit – Leveraged token makes it easy for you to easily create more profit than the rest of the market and losses.
- 👉 Lower Risk of Liquidation – Rebalancing helps to reduce the risk of liquidation. Since it will sell some of its positions, it will not be completely wiped out even if the token value drops.
- 👉 Risk management – When trading leveraged tokens, you don’t have to worry about liquidation risk, margin and collateral. If you are at a profit, it will automatically reinvest it into the underlying asset, and it will rescue chances automatically if at a loss.
DRAWBACKS OF LEVERAGED TOKENS
- 👉 Short term Investment – if you purchase and hold ETH, and it rises in value over time, you will profit regardless of day-to-day market conditions. However, if you buy and hold an ETHBULL token, any price movements will be magnified, resulting in a significant loss.
- 👉 Volatility Decay – Simply means a negative effect on the investment. Suppose you bought $1000 worth of bitcoins. Your investment has increased to $1100 overnight due to a 10% increase in price. But the next 24 hours, your investment decreases to $990 because of the 10% decrease in price, which would be a $110 loss.
Let’s assume you invested $1000 in a leveraged token 3x Bitcoin? Thus, you would get a 30% increase in the first 24 hours, raising your investment to $1300. However, you would also lose 30% of your money on day two, meaning that you would only have $910. A slight loss on average crypto trading will result in a more significant loss on a leveraged token.
- Extra Fees – Leveraged Tokens charge trading fees, daily management fees, issuance/redemption fees, and funding fees, varying among exchanges.
- Scarcity – Leveraged tokens are not sold on many exchanges.
- Algoriz Review
- Quadency Review
- Tradesanta Review
- Shrimpy.io Review
- Best Cryptocurrency Portfolio Trackers
- Best Crypto Telegram Groups
- Intelligent Cryptocurrency Review
- Is 3Commas Safe?
- Coinrule Review
- NapBots Review
Leveraged tokens are for those who want leverage without dealing with the nitty-gritty of leverage trading. When trading on the spot trading market, leveraged tokens are the most convenient way to gain access to margin. However, care should be taken when dealing with them as they can also amplify losses.
CaptainAltcoin's writers and guest post authors may or may not have a vested interest in any of the mentioned projects and businesses. None of the content on CaptainAltcoin is investment advice nor is it a replacement for advice from a certified financial planner. The views expressed in this article are those of the author and do not necessarily reflect the official policy or position of CaptainAltcoin.com