In the world of cryptocurrencies, leveraged tokens give you a leveraged position in trading, meaning that your earnings and losses are multiplied.
What Are Leveraged Tokens?
Leveraged tokens feature both fixed and variable leverage. Conventionally, these assets rebalance themselves daily at 00:02:00 UTC or when the spot market price changes by 10%. However, it’s not the same for all crypto exchanges. Some exchanges have different sets of rules in place for rebalancing.
Important Note:
Make sure you properly understand leveraged tokens before you trade them because of their high-risk nature.
How Is Leverage Calculated?
Let’s say you are holding a 3X Long Bitcoin Token and its price is $19,269.15. The leverage will be 3X =$19,269.15*3/$19,269.15+3*($19,269.15–$19,269.15).
Now, in case the price of 3X Long Bitcoin Token increases to $20,000, the leverage will be $20,000*3/$20,000+3*($20,000–$20,000).
When the price of a 3X Long Bitcoin Token (or any leveraged token you are using) decreases, the leverage goes up. On the other hand, if the price increases, it goes down.
For every 1% Bitcoin goes up in a day, 3X Long Bitcoin Token goes up by 3%; for every 1% Bitcoin goes down, 3X Long Bitcoin token goes down 3%.
Why Are Leveraged Tokens Used?
These are used mainly for the following three reasons:
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Managing Risks
Leveraged tokens manage risk on their own. They automatically reinvest the profit into the underlying asset and sell some of them online when the price drops—to avoid potential liquidation risk.
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Managing Margin
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ERC-20 Tokens
Essentially, these are ERC-20 tokens, which means you can withdraw them whenever you want. Leveraged tokens are preferred over margin positions because you have the liberty to send them to any ETH wallet or transfer to any other platform that supports them.
How to Buy or Sell Leveraged Tokens?
There are multiple ways to buy or sell leveraged tokens. However, three of the most common ways include:
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Spot markets are recommended to buy or sell them. You have to visit the spot market of the leveraged token on any exchange to trade these tokens.
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Another way is by converting your cryptocurrency in your wallet to leveraged tokens.
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The least common way among the three is the creation or redemption of leveraged tokens. This method is only suitable when you’re completely aware of their working and have gone through the documentation of the platform.
Leveraged Tokens are high-risk products and you should consider their pros and cons before trading them.