Investing in leveraged tokens is on the rage these days. Should you follow the trend or wait and see if it's worth the risk?

Leveraged tokens

Investing in leveraged tokens can be a gateway to multiply your profits. However, it also means your losses will be doubled as well. Many choose to invest in leveraged tokens without actually understanding the risk that comes with them.

But despite all the liability, some benefits make them attractive for crypto traders and investors.

 

What are Leveraged Tokens?

A leveraged token is a type of ERC20 token that allows traders to get a leveraged trading position in a digital asset. By using the token, traders don't have to worry about dealing with margins, collateral, and liquidation.

The simplicity of such tokens brings them a lot of attention from crypto traders worldwide since their launch. However, leveraged tokens are not suited for inexperienced traders, as well as those who are looking for long-term investment.

Leveraged tokens were first introduced by FTX, a crypto derivatives exchange that aims to provide a new way for traders to take leveraged positions in the digital market.

Since then, more trading platforms began to provide leveraged tokens. Most of these tokens can rebalance themselves to help maintain the target leverage range.

Some examples of leveraged tokens in the market are:

  1. Pionex: This token offers high leveraged exposure with an optimized rebalancing mechanism. The rebalancing can be triggered when the leverage exceeds a particular limit.
  2. BLVT: BLVT is a leveraged token from Binance, one of the biggest crypto exchange platforms in the market. This token does not balance periodically, but only when necessary.
  3. FTX: Leveraged tokens native to the FTX exchange, consisting of BULL, BEAR, HEDGE, and HALF. The tokens rebalance every day at 2:00 AM UTC.

 

How Do They Work?

So, how does one gain profit from investing in leveraged tokens? Let's say a trader wants to buy a leveraged token called 3X Ethereum Token (ETHBULL). This token triples the profits of an Ethereum investment.

For example, if Ethereum increases by 3%, the ETHBULL value will increase by 9%. However, if the ETH value dropped 3%, that also means the trader will suffer 9% more losses. This is why leveraged tokens are considered high-risk but high-return investments.

 

Benefits of Leveraged Tokens

Despite the risk, there are a lot of benefits traders can get from investing in leveraged tokens. These are some characteristics that make investing in these tokens worth your time.

 

1. Rebalance

One of the most important characteristics of leveraged tokens is the ability to rebalance. These tokens normally have leverage targets higher than their underlying asset. The token will rebalance automatically to maintain this leverage.

Profit will be invested if the tokens make money. On the contrary, the token will sell some of its positions if it loses money. Most leveraged tokens rebalance every day.

The exchange in which the token is being offered may have triggers that cause it to rebalance during high volatility periods. Some exchange platforms have different rules when it comes to daily rebalance.

For example, Binance uses a leverage range instead of other specific targets like other platforms. Their target leverage is 1.25 to four times the price of the asset.

 

2. Simplicity

Most margin trading is complex and requires active management. But, investing in leverage tokens offers simplicity for all traders involved. This is the reason why these tokens quickly gain popularity among crypto traders.

For example, there is no collateral or margin involved. The daily rebalance can lower the risk of liquidation. Even when the token drops in value, it will sell some of its position, making it unlikely to be wiped out.

 

3. Good For Intraday Position

Leveraged tokens rebalance themselves daily, so they can bring profit by the end of the day. That's why investing in a leveraged token is perfect for traders who are interested in intraday leveraged positions. Especially because these tokens exist on the Ethereum blockchain, you can track them transparently from an Ethereum wallet.


The Disadvantages of Leveraged Tokens

Like any other product, leveraged tokens also come with risks and disadvantages. Some of them might seem trivial, but they can affect how you trade or invest in this product.

 

1. Not All Crypto Exchanges Sell Them

Despite its popularity, leveraged tokens are still quite rare, especially for US residents. There is only a handful of crypto exchanges that provide these tokens.

Some of them don't allow cash for deposits, which can be a deal-breaker for some traders. In this case, you can utilize another crypto exchange that allows you to deposit money then transfer those funds to an exchange platform that sells leveraged tokens.

 

2. Volatility Risk

Volatility is one of the biggest risks you should be aware of before investing in leveraged tokens. For example, you are interested in investing in Ethereum and decide to buy $200 worth of ETH.

The next day, the price increases by 10%, so that means your investment is now worth $220. But, what if you decide to hold it and the price decrease by 10%? Then it means you lose $22 from your current value, so your money now is $198.

 

3. Extra Fees

Extra fees are another issue to be addressed when investing in a leveraged token. Normally, these tokens have additional management fees that most traders don't know about.

For example, FTX leveraged tokens have a daily management fee of 0.03%, while Binance leveraged token's management fee is 0.01%. While those number seems small, imagine how much they will cost if accumulated over a year. This is another example of why leveraged tokens are better suited for short-term investments.

 

Should You Invest in Leveraged Tokens?

With all the advantages and disadvantages laid out, should you really consider investing in leveraged tokens? Actually, using a leveraged product is not entirely a bad thing.

That being said, some rules should be followed when using products such as leveraged tokens. First, do your research thoroughly, then ask yourself How much money you are willing to risk? Will the profit be worth all the risks involved?

Investing in the leveraged product is more suitable for experienced traders in intraday trading. An inexperienced trader should think twice before using the highly leveraged product since the chance of losing money is much higher.

Another factor you should consider is that these tokens are still new and pretty much experimental. So, you might want to wait and see the prospect of this market before investing your money.

 

Aside from leveraged tokens, the digital currency industry has evolved so much that many types of tokens keep emerging and have their own markets. One interesting type of token is non-fungible tokens, which can also be used to earn money in the gaming industry. How come? Learn about it further in 10 Best NFT Games to Win Rewards.