What is Leveraged Token?
When to use Bull, Bear Token? How does Leveraged Token work? Learn about Leveraged Tokens here!
In today’s article, I will introduce to you an extremely innovative financial product that is Leveraged Token (Leveraged Token).
Understanding and grasping it will be a great opportunity for you to Trade Margin Crypto.
So what is Leveraged Token? Let’s follow the article with me!
What is Leveraged Token?
Leveraged Token (or Leveraged Token) is a token whose price changes based on the price change of the original token (BTC, ETH, XRP, ..), created to help Traders have one more option to search. profits in the Crypto market.
These are ERC-20 Tokens and can be stored on ERC-20 wallets.
Leverage token is like a regular token in that it can participate in Spot trading, but it is different in that it comes with leverage for higher profits when compared to the same asset in the regular version (ie Margin Trading).
And of course, higher returns also come with higher risks.
Types of Leveraged Tokens?
FTX exchange is the exchange that created Leveraged Token. Currently, Leveraged Token products are used on many other major exchanges such as Binance, Gate. There are 3 types of Leveraged Tokens used on FTX: BULL (+3x), BEAR (-3x) and HEDGE (-1x).
Example with ETH:
- If ETH is up 1% in a day, ETHBULL is up 3%, ETHBEAR is down 3%, and ETHHEDGE is down 1%.
- If ETH is down 1% in a day, ETHBULL is down 3%, ETHBEAR is up 3%, and ETHHEDGE is up 1%.
Advantages and disadvantages of Leveraged Token
In the process of learning about Leveraged Token, I realized that this is an extremely creative and useful derivative product, but not a perfect product.
It still has its own advantages and disadvantages as follows:
1. Easy to use
Leveraged Token has a trading method similar to the way you buy and sell on Spot Trading exchanges. Overall it’s very easy to use.
The way to make profits is similar to Spot Trade, he buys Hold and sells when the price is high to find a profit.
2. Cheap transaction fees
The transaction fee of Leveraged Token is usually cheaper than Contract Trading and Future Trading.
The related transaction fees when Trading Leveraged Token are: Trading Fees (divided into 0.02% Maker & 0.07% for Taker) and daily management fee 0.03%/day (FTX Exchange).
If you buy $1000 worth of ETHBull and hold it for 30 days, the fee you will incur is the transaction fee (0.02% when you buy and 0.07% when you sell) plus 30 x 0.03 management fee. daily management. Total about 0.99% for 1 month.
While Contract Trading and Futures have more expensive fees. For example, when you Trade Contract on Snapex, when you hit x10 and Hold for 30 days, the fee can be up to 13.5%.
3. Not liquidated
One advantage of Leveraged Tokens is that they do not burn when the price drops too much.
If you trade Contracts, with x3 leverage, as long as the BTC price drops by 34%, your assets will be liquidated or burned and you will lose money.
With Leveraged Token Bull Bear, it is similar to trading with x3 leverage. Due to the daily rebalancing mechanism, your assets will not burn.
That asset can be divided by 2 divided by 3, but in theory, you can still remove the gauze when the market goes in the right direction you analyze.
Complicated, difficult to understand calculation method
Although it has a simple use like Spot Trading that he often uses to buy and sell Crypto on exchanges, the calculation from Spot Trading’s price to Leveraged Token’s price is quite complicated, confusing and subject to many influences. verbs from several other factors.
If you do not understand enough about Leveraged Token, which cases should be used, and which cases should not be used, it may lead to a large loss.
Because anyway this is still a Crypto product related to Leveraged Token.
How Leveraged Token works
In this part, I will introduce to you how Leveraged Token works.
In the short term, you can take the x3 milestone to visualize the Leveraged Token.
There are currently 3 types of Leveraged Tokens used on FTX: BULL (+3x), BEAR (-3x) and HEDGE (-1x). If ETH is up 1% in a day, ETHBULL is up 3%, ETHBEAR is down 3%, and ETHHEDGE is down 1%. If ETH is down 1% in a day, ETHBULL is down 3%, ETHBEAR is up 3%, and ETHHEDGE is up 1%.
But in reality, Leveraged is much more complicated than that. It has two laws of price rebalancing as follows:
- Rebalance (balance) the price at 2h UTC (9h GMT+7).
- Or Rebalance (rebalance) the price when the underlying asset price fluctuates more than 10% during the day.
To make it easier for you to understand, I will take a few examples for you to understand.
Rebalance price at 2h UTC (9h GMT+7): This is the first price rebalancing law of Leveraged Token. It will rebalance the price on a daily basis to ensure a 3X position for the token, timed at 2h UTC (9h GMT+7).
Case 1: The price increases by 10% during the day.
- If you Trade Margin x3 or Perp x3, your profit is 3 x 10% = 30%
- With ETHBULL, in this case you still have a profit of 3 x 10% = 30%.
Case 2: Price increases by 10%, 5% before 2am UTC and 5% after 2h UTC
- Trade Margin x3 or Perp x3, your profit is still 3 x 10% = 30%
- With ETHBULL, in this case your profit will be calculated (1 + 3 x 5%) x (1 + 3 x 5%) -1 = 32.25%.
In the second case, if the price at the time before 2 o’clock UTC the price is increasing by 5% then the profit amount is 15%.
By 2 o’clock UTC, the position was rebalanced. If at that time the price increases by 5%, the amount you earn will be 15% of the previous total amount (a type of compound interest calculation).
Rebalance the price of the underlying asset when the price fluctuates more than 10% during the day:
The above case applies when the price fluctuates as low as or equal to 10% a day. What if prices fluctuate more than 10% a day?
Now we have a second rebalancing law: Rebalance (rebalance) the price when the price fluctuates more than 10% during the day.
Case 3: Price increases by 15%/day
- If you Trade Margin x3 or Perp x3, your profit is 45%
- With ETHBULL, in this case your profit will be: (1 + 3×10%) x (1 + 3×5%) – 1 = 49.5%
Similar to the case of 15% discount / day.
- If you Trade Margin x3 or Perp x3, you will lose 45%
- With ETHBULL, you will lose: (1-3×10%) x (1-3×5%) -1 = – 40.5%
You can understand the second law of balance, the underlying asset price (in this case, the price of ETH) fluctuates more than 10% in 1 day (before 2am UTC), the value of your money decreases by 30%. calculated on your original amount. The position will then automatically rebalance.
Some notes when Trade with Leveraged Token
Here are some notes for you when Trade Leveraged Token.
In a normal fluctuating market (5 – 10%/day), a Leveraged Token transaction gives the same results (in the short term) with a Contract x3 transaction.
Based on the calculation formula, you can see that, if the market fluctuates low, your trading of Leveraged Token gives the same results when Trade Contract x3 or Margin x3. This gives you one more option.
But, this only happens in the short term, guys because we have a daily rebalancing law. Small but cumulative changes add up to a big change in results.
Should Trade with Leveraged Token when trending, not suitable for Sideway
From the 2 position balancing formulas that I shared above, it can be seen that Leveraged Token is suitable for trading when the market has a clear trend, not suitable for Sideway.
When Trend goes in the right direction in the long term, your profits are usually more than x3.
Consider exiting when the price fluctuates strongly, up and down more than 10%/day
Just like the previous hour increased 20% but the next hour decreased 20%, according to the position balance formula, you will lose. So when the price fluctuates like that, you should not trade Leveraged Token.
In this article, I have explained to you what Leveraged Token is, as well as an overview of their advantages.
I also explained the 2 Rebalance laws of Leveraged Token, as well as some notes when you Trade with Leveraged Token. Hope this article helps you in your investment process. If you have any questions, don’t hesitate to leave a comment below the article. I and the idolmeta.net team will answer you right away!