What are Leveraged Tokens?
Let's find out Leveraged Tokens meaning, definition in crypto, what are Leveraged Tokens, and all other detailed facts.
Leveraged Tokens are a type of high-risk ERC-20 tokens that grant their holder a leveraged position in trading, unlike any of the traditional trading methods at the moment. They feature two types of leverage: fixed and variable.
Moreover, leveraged tokens rebalance themselves at 00:02:00 UTC every day. Additionally, they also rebalance once the spot market price changes by 10%.
Keep in mind that this is not applicable to every single exchange. There are certain cryptocurrency exchanges that enforce different rules when it comes to rebalancing leveraged tokens.
Besides, by holding leveraged tokens, you won’t have to understand liquidation risk or need to take care of the margins. This makes them appealing to certain investors.
Why Do People Buy Leveraged Tokens?
There are three core reasons for using leveraged tokens. They stem from the main benefits leveraged tokens offer:
- Risk management. Leveraged tokens are beneficial when it comes to managing risks since they automatically reinvest the profit into the underlying asset and takes appropriate action such as waiting for the price to decrease so they could sell it. This is a solution that helps to avoid liquidation;
- Margin management. An investor can reach a leveraged position without taking into account features like margin, collateral, or liquidity, among other things. This means you can obtain the 3X Long Bitcoin Token by spending the exact price of the said token;
- ERC-20 tokens. In most cases, leveraged tokens are based on an ERC-20 standard. Therefore, they can be withdrawn at any time. This means the holder can move their tokens to any Ethereum wallet or supported platform unlike when holding a margin position.
How to Trade Leveraged Tokens?
You can buy or sell leveraged tokens in various ways. Here are some of them:
- Have cryptocurrency in your wallet? You can convert it into leveraged tokens;
- Simply trade in spot markets. It’s the recommended way to obtain leveraged tokens as well as to sell them;
- Subscribing to, or redeeming leveraged tokens. It’s an unusual way of obtaining these tokens. However, it’s important to keep in mind that a deep knowledge of leveraged tokens is strongly advised when using this method.
As mentioned above, you should carefully evaluate the pros and cons before participating in leveraged token trade.
How to Calculate Leverage?
In order to understand how to calculate leverage, keep in mind that when the price of the leveraged token decreases, the leverage goes up. Similarly, when the price of the leveraged token increases, the leverage goes down.
Let’s use an example. You hold 3X Long Bitcoin Token that’s valued at $25,000. This is how you would calculate the leverage - 3X=$25,000*3/$25,000+3*($25,000-$25,000).
However, if the price of your digital asset increases to $35,000, this is how you would calculate the new leverage - $35,000*3/$35,000+3*(35,000-$35,000).