What Are Leveraged Tokens and how to use them responsibly

Thu Jul 27 2023

Leveraged Tokens

Algorithmic cryptocurrency trading has witnessed a significant surge in popularity in recent years, as traders seek automated solutions to capitalize on the volatile nature of crypto markets. During this time, leveraged tokens have emerged as a highly sought-after investment product for traders aiming to gain leveraged exposure to crypto assets without managing a leveraged position manually. Leveraged tokens, ERC20 assets that track the price changes of an underlying asset while leveraging its returns through the use of derivative instruments, have garnered substantial attention.

The Emergence of Leveraged Tokens in Crypto Trading

Leveraged tokens are designed to magnify profits (and losses) when trading. They can be useful for short-term speculation, but their price tends to zero in the long run. Hence, they should only be traded if traders know how they work and have strong convictions about the future price movement of the underlying cryptocurrency.

Understanding Leveraged Tokens

The concept behind leveraged tokens is relatively straightforward. These tokens enable traders to amplify their potential profits (and losses) during trading activities. They are particularly attractive for short-term speculative plays, as they offer the opportunity to magnify gains with relatively small initial investments. However, it’s crucial to recognize that leveraged tokens tend to approach zero in value over the long run, making them unsuitable for extended investment horizons.

Presently, there are over a hundred leveraged tokens available for trading across various exchanges, including prominent platforms like Poloniex, MXC, Bitmax, Gate, and others. Among all issuers, Binance stands out as a notable player in the space. The exchange recently introduced its own leveraged tokens following the ERC20 standard. This implementation allows traders to seamlessly transfer these tokens between exchanges that support them and store them securely in their Ethereum wallets.

Binance is the most notable issuer of leveraged tokens, having recently launched its own leveraged tokens that follow the ERC20 standard. This allows traders to transfer them between exchanges that support these tokens, as well as store them on their Ethereum wallet.

Benefits and Risks of Leveraged Tokens

One of the main advantages of leveraged tokens is that they automatically reinvest profits back into underlying profits, thereby reducing risk in case of losses. Rebalancing of leveraged tokens occurs daily, which ensures that the token maintains a constant leverage level and avoids liquidation risk. If the token makes money, it will automatically open 3x leveraged positions in the underlying asset.

Although leveraged tokens have the potential for greater returns, they are also vulnerable to volatility decay and management fees. Therefore, they are not suitable for long-term investments and work better for day trading and other forms of short-term investment.

How to Acquire Leveraged Tokens

Purchasing leveraged tokens is as straightforward as acquiring regular ERC20 tokens on the spot market. Since they are based on the Ethereum blockchain, they can be withdrawn from the trader’s account and transferred to exchanges that list the tokens. However, it’s essential to be aware that leveraged tokens typically incur additional management charges, such as daily management fees, which may vary across different platforms. For example, Binance leveraged tokens may have a daily management fee of 0.01%.

Optimizing Crypto Trading Strategies with Leveraged Tokens

In conclusion, algorithmic cryptocurrency trading platforms and cryptocurrency trading bots can undoubtedly leverage the benefits of incorporating leveraged tokens into their trading strategies. These tokens offer traders the potential to magnify profits in the short term, making them appealing for day trading and other forms of short-term investment. However, it’s crucial for traders to be fully aware of the risks associated with leveraged tokens and to invest in them only when they have a strong conviction about the future price movement of the underlying cryptocurrency.

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