They are known to maintain variable or fixed leverage. The leverage is rebalanced at 2:00 am daily and when the spot market price changes by ten percent in the conventional leveraged tokens.
Nonetheless, various exchanges follow different methods to rebalance their leveraged tokens. This article systematically discusses the top three deals that are known to offer leveraged tokens.
Let’s start with this example, take ETBULL, which is a 3x long ETH token. For every 1 percent ETH goes up in a day, ETHBULL goes up 3 percent; for every 1 percent ETH downward, ETHBULL goes down by 3 percent.
BNBBEAR (3x short BNB Token): If BNB/USD goes up 10 percent, the token’s value loses 30 percent; if BNB/USD is down 5 percent, the value of the token goes up 15 percent.
ADABULL (3x long Cardano token): if ADA/USD is up to ten percent, the token’s value is gaining 30 percent; if ADA/USD is down 5 percent, the token’s value goes down to 15 percent.
Some peculiar futures may have leveraged tokens with other margin ratios.
Before moving further, let’s discuss briefly the top three exchanges that offer leveraged tokens;
Binance: This is known to provide Binance Leveraged Tokens, called BLVT, with variable leverage between 1.25x and 4x. This is one of the best crypto exchanges in the market. It is known to offer Binance Leveraged Tokens (BLVT) tokenized versions of future leveraged positions. They are known to represent a basket of open positions on the perpetual futures market.
FTX: This was the first exchange to introduce Leveraged Tokens— Bear Token and Bull Token. They are known to offer leverage up to 3x. And they have defined precise operations and trigger balancing, not to forget the methods of calculating the token price.
For FTX, they do advise you to use the SPOT market to buy and sell leveraged tokens.
Pionex: This is known to provide leveraged tokens with an optimized rebalancing mechanism. They have well-designed specific rules to trigger rebalancing. In essence, these types of tokens offer high leveraged exposure with an optimized rebalancing mechanism.
They also offer variable target leverage that fluctuates within a specific range according to the crypto asset price. The rebalancing is triggered if such leverage exceeds a particular limit.
They are known to use the Coin + Leverage + Long/Short name for Pionex leveraged tokens. Now, for example, ETH3L indicates ETH 3X Long.
The way a Leveraged Token works
Each Leveraged token gets its price action by trading FTX perpetual futures.
For example, let’s say that you want to create 10,000 dollars of ETHBULL. To do so, you send in 10,000 dollars, and the ETHBULL account on FTX purchases 30,000 dollars’ worth of ETH perpetual futures.
So thus, we can say that ETHBULL is now 3x long ETH.
You can also redeem leveraged tokens for their net asset value. To do that, you can send our 10,000 dollars of ETHBULL back to FTX and save it. This will destroy the token and cause the ETHBULL account to sell back the 30,000-dollar worth of futures and credit your account with 10,000 dollars.
Such creation and redemption mechanism ultimately enforces the leveraged tokens, in which they are worth what they are meant to be.
Why do we use Leverage Tokens?
There are three reasons to use leveraged tokens;
Managing Margin: You can purchase leveraged tokens just like a regular ERC20 token on a spot market. There is no need to manage collateral, liquidation prices, margin, or the rest similar to that; you spend 10,000 dollars on ETHBULL and have a 3x leveraged long coin.
ERC20 Tokens: Leverage Tokens are also ERC20 tokens. This means that, unlike margin positions, you can withdraw them from your account. All you have to do is go to your wallet and send leveraged tokens to any ETH wallet.
This means you can custody your leveraged tokens; it also means that you can send them to other platforms that list the leverage tokens, like BitMax or Gopax.
Managing Risk: BULL/BEAR/HEDGE tokens will automatically reinvest profits into the underlying asset, so if your leveraged token position makes money in any way, the tokens will automatically put on 3x leveraged positions with that.
Vice versa, BULL/BEAR/HEDGE tokens will automatically reduce risk if they lose money. If you put on a 3x long ETH position and over a month ETH falls 33 percent, your position will be liquidated, and you will have nothing left.
However, if you buy ETHBULL, the leveraged token will automatically sell off some of its ETH as the markets do go down— this is a likely term, especially when they want to avoid liquidation so that it still has assets left even after a 33 percent down move.
HALF tokens are the opposite. They are only ½ leveraged; HALF tokens will sell off their underlying when it increases and repurchase it when it reduces.
PROs and CONs of Leveraged Tokens
| PROS | CONS |
|---|---|
| Leveraged Tokens are known to enable you to gain the needed exposure to leveraged trading positions without maintaining margin, management, collateral, and risk. | They are tied to the exchange. |
| Use leveraged positions without caring about liquidations in any way. | Less liquidity than regular markets |
| Use leveraged positions without collateral. | They are not created for holding; you have to buy and sell them; do not hold them. |
| They are known to offer fixed, and variable leverages. In addition, the rebalancing mechanisms help in maintaining the target leverage range. |
Where to get Leveraged Tokens
There are various ways this can be done;
Binance:
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This is one of the best crypto exchanges in the market presently. It is known to provide Binance Leveraged Tokens, also called in short BLVT. These are tokenized versions of leveraged futures positions.
They are known to represent a basket of open positions on the perpetual futures market.
Features of BLVT:
- • You cannot withdraw BLVT from your wallet in any way. In simple terms, you can only store BLVTs in your Binance account.
- • Binance does try to maintain leverage between 1.25x and 4x.
- • The redemption and subscription limit of each BLVT is quite different.
- • You can check your redemption history and subscription.
- • The Net Asset Value (NAV) is the value of BLVT in USDT.
Binance Redemption fees:
There are two options, especially when you wish to exit your position;
- • Redeem the value of your BLVTs in USDT. Nonetheless, in such a case, you have to pay a redemption fee of 0.1 percent. In addition, redemption is costly in many cases and used in unusual situations.
- • Sell BLVT in the spot market.
FTX:
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FTX was the first exchange to introduce the design of leveraged tokens. They are known to offer leveraged tokens, and you can check the complete list on some sites.
There are four leveraged tokens for every future on FTX: BEAR (-3X), HEDGE (-1X), HALF, and BULL (+3x). Nonetheless, some futures may have leveraged tokens with other margin ratios.
There are three various ways to buy/sell leveraged token using FTX;
- • Exchange coins
- • Creation or Redemption of a leveraged Token. This method is not advised because you don’t know the price you’ll receive, only if you have thoroughly done the process.
- • Spot Market
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Written by: Narender Charan
