Leveraged Tokens

November 21, 2023 - Around 3 mins mins to read

Understanding Leveraged Tokens

Leveraged Tokens are a type of ERC-20 tokens that offer leverage to holders, enabling them to automatically gain a leveraged position without the need for traditional trading methods. These tokens provide convenience by eliminating the requirement to manage margins or comprehend liquidation risk.

Leveraged tokens can have fixed or variable leverage. Typically, these tokens rebalance themselves daily at 00:02:00 UTC or when the spot market price changes by 10%. However, different crypto exchanges may have their own rules for rebalancing.

It is crucial to have a proper understanding of leveraged tokens due to their high-risk nature before engaging in trading.

Calculating Leverage

To calculate leverage, let’s consider the example of holding a 3X Long Bitcoin Token with a price of $19,269.15. The leverage would be calculated as follows: 3X = $19,269.15 * 3 / ($19,269.15 + 3 * ($19,269.15 – $19,269.15)).

If the price of the 3X Long Bitcoin Token increases to $20,000, the leverage would be calculated as: $20,000 * 3 / ($20,000 + 3 * ($20,000 – $20,000)).

When the price of a leveraged token decreases, the leverage increases. Conversely, if the price increases, the leverage decreases.

For every 1% increase in Bitcoin’s price, a 3X Long Bitcoin Token increases by 3%. Similarly, for every 1% decrease in Bitcoin’s price, a 3X Long Bitcoin Token decreases by 3%.

Benefits of Leveraged Tokens

Leveraged tokens are primarily used for the following reasons:

Managing Risks

Leveraged tokens have built-in risk management mechanisms. They automatically reinvest profits into the underlying asset and sell some of them when the price drops to mitigate potential liquidation risk.

Managing Margin

Leveraged tokens allow you to gain a leverage position in the cryptocurrency market without the need for margin, collateral, liquidity, or other related factors. In simple terms, you can invest a specific amount, such as $19,269, and have a 3X Long Bitcoin Token.

ERC-20 Tokens

Leveraged tokens are ERC-20 tokens, which means they can be withdrawn at any time. These tokens are preferred over margin positions as they can be sent to any ETH wallet or transferred to any platform that supports them.

Buying or Selling Leveraged Tokens

There are multiple ways to buy or sell leveraged tokens, with the following three being the most common:

Spot markets are recommended for buying or selling leveraged tokens. You can visit the spot market of the leveraged token on any exchange to trade these tokens.
Another method is to convert your cryptocurrency in your wallet into leveraged tokens.
The least common method is the creation or redemption of leveraged tokens, which should only be pursued if you have a complete understanding of their functioning and have thoroughly reviewed the platform’s documentation.

It is important to carefully consider the pros and cons of leveraged tokens before engaging in trading, as they are high-risk products.

Glossary