Introduction
Binance leveraged tokens are crypto products that offer leveraged exposure to the underlying asset. Leverage tokens are a type of derivative product, and traders can access them on the Binance spot market. Price fluctuations in the perpetual contract market affect the price movements of leveraged tokens. Binance allows you to gain leveraged exposure without holding any collateral or worrying about the risk of liquidation. Leveraged tokens are inappropriate for all cryptocurrency market traders because they can lose their initial investments if the market swings against their position. Binance leveraged tokens allow users to maintain their leveraged position between 1.25x and 4x, which leads to maximizing profitability.
Explanation of what Binance Leveraged Tokens are
Binance developed an advanced product called Binance Leveraged Tokens to manage a leveraged position in the spot market. A trader buying a leveraged token increases exposure to the underlying asset, which will cause leveraged token price swings along with the market direction by a factor of change. For example, if the underlying asset price increases by 1 percent, the price of the 3x leveraged token would increase by 3%.
Traders will have an easy way to leverage cryptocurrencies’ positions without engaging in margin trading. The risk of liquidation always pursues these tokens when the price of the underlying asset swings against the user’s position.
A brief history of leverage trading
Since the creation of financial markets, leveraged trading has been around, and in the Middle Ages, new traders used the idea of lending money to increase commercial control. The first official stock market was established in Amsterdam in the 17th century, and leveraged trading started with it. The stock market allowed investors to borrow money and keep the asset as security in return.
Leverage trading rapidly developed in the 20th century, making financial markets more expandable for businesses. Because of the changing economic circumstances, new financial terms, such as options and futures trading, were developed, providing new opportunities for investors. Similarly, with the rapid development of the crypto market in recent years, such terms as leverage trading, margin trading, options trading, and quarterly trading have been introduced.
How Leverage Tokens Work
Leveraged tokens are traded on the spot-market rather than in the other crypto markets. To maintain the target margin ratio on the Binance spot-market, the exchange controls the daily rebalancing of the leverage because it is more challenging to trade these tokens without obtaining liquidity. There are some essential titles to understand about how it works, which are as follows:
Definition of leverage
Investors who want to maximize their profits on investments borrow money from another financial platform, which is known as “leverage.” Due to the facility to borrow money from the financial platform, a trader can open a position with high capital while having little money. For example, a trader can manage a position with $200 while owning $100 using 2x leverage.
An explanation of how Binance Leveraged Tokens work
Like other tokens, BLTs can be exchanged on the spot market. A virtual universe of perpetual contract positions is maintained by Binance for each leveraged token. Twenty of the fundamental cryptocurrencies are represented by leverage tokens on Binance; for instance, BTC is an underlying currency, while BTCUP and BTCDOWN are leveraged tokens of BTC. Similarly, each token has two versions: up and down, so the platform has forty tokens for trading, and there are 20 underlying-assets for these pairs till April-2023.
The Up tokens represent the Buy/Long trading positions, the Down tokens represent the Sell/Short positions of the trade, and the platform provides 4x leverage on each token. When the leverage level moves, increasing or decreasing, due to price movements in the perpetual contracts, which affect the price of the leverage token, that is why Binance manages the daily rebalancing of their tokens to maintain the ratio.
Comparison to traditional leverage trading
The critical difference between a traditional and a leverage token on Binance is the detailed understanding of leverage trading in perpetual contracts. Margin, options, and quarterly trading are available in the crypto market. Apart from leverage trading, risk is involved in all these trading positions, and users have to deeply research price fluctuations and market sentiment to save their trading positions. On the other hand, users can trade on BLTs without the risk of liquidation, which makes it easier to get 4x leveraged.
Trading with Binance Leveraged Tokens
Traders can use leverage to increase the rewards on their trades by using a 4x leverage multiplier which is accessible for both long and short positions. Here is step by step guide to get started in Binance Leveraged Tokens.
Available tokens for trading
Twenty underlying assets and forty leveraged tokens are available on Binance, which are detailed below.
Please refer to note that these tokens are not available with the pair of USDT or any other stablecoins. Before starting trading on the platform, users will hit the “agree to the terms and conditions” tab because this is the forum’s disclaimer. Users can then regularly trade these coins on the spot-market and may subscribe or redeem them. The following are the fees related to BLTs:
i. Trading fees
Binance deducts the trading fees on BLTs are the same as on the spot-market. Binance does not charge any fees for transferring funding rates, so the funding fee is directly between traders.
ii. Subscription fee
When users pick the “Subscribe” tab, subscription fees are charged at a rate of 0.1% per choice.
iii. Redemption fees
The redemption fee on the platform is 0.1% per redemption.
Exploring the leverage tokens
Users first find the homepage and click the fourth position, “Derivatives,” at the menu bar. Users can get the “Leverage Tokens” icon again at the fourth position and click on it. After that, users will be able to explore all tokens with their features, such as “Trade,” “Subscribe,” and “Redeem.”
Pros:
1. Unlike margin trading, users of the Binance exchange can track it to trade and access it.
2. A fixed margin level lowers the chance of liquidations or margin calls.
3. The daily trading limit may change according to prevailing market circumstances so that users can benefit from it.
Cons:
1. High market volatility may affect BLTs’ prices, leading to loss.
2. It is created for short-term trading so that long-term investors could get losses, which could be better for them.
3. Understanding the leverage level and price fluctuations is complicated, so some traders need help getting the science which leads to losses.
Risks Associated with Leverage Tokens on Binance
Like any leveraged financial product, BLTs have inherent risks. To prevent potential losses, traders must be aware of these risks and manage them effectively. Now, we discuss some terms regarding risks associated with the tokens,
Risks with leverage trading in general
Borrowing money is a crucial component of leverage trading, which increases the amount of trade. The possible profit is increased, but the potential loss is also increased. Users may be asked to provide an extra margin if the price of the original asset swings against their position.
Potential risks specific to Binance Leveraged Tokens
Over time, the daily balance of the token to maintain the target margin ratio may cause its value to deviate from the value of the original asset, and market conditions may also affect the token’s value. It is only sometimes possible for the margin ratio to remain within the target leverage range. Hence, extreme market volatility affects the price to initiate or exit long or short positions.
Conclusion
In conclusion, Binance Leveraged Tokens is an advanced financial product that allows traders to get leverage to cryptocurrencies and other digital assets without traditional margin trading. The daily rebalancing feature can control risk and ensure the leverage ratio stays within the desired range and is reflected in the current asset price of the leveraged tokens. Traders should use these tokens carefully and understand the market conditions well, as they are unsuitable for all traders.
Recap of what BLTs are and how they work
Traders can trade and will get benefit from leveraged tokens without engaging in traditional margin trading. These tokens rebalance daily to maintain the target leverage ratio that is suitable for traders, and users can’t redeem tokens during this process.
Final thoughts on the usefulness of BLTs
BLTs can be a valuable asset for traders who want to benefit from the crypto market without the complications and risks of traditional margin trading. Their daily balance can help manage risk and ensure the margin ratio remains within the desired range.
Recommendations for traders interested in using BLTs.
Traders interested in using BLTs should do research before investing to avoid potential risks. In addition, traders should have a good understanding of the crypto industry, Binance futures, and changing market conditions. So that if ever the trading positions are in danger, they can save their positions by making their strategy according to the news and market sentiment that is affecting them.
FAQs:
1. Do Binance Leveraged Tokens rebalance?
It rebalances only when necessary, mainly during periods of sharp market volatility. Binance proprietary algorithms control how positions in leveraged tokens are rebalanced because leveraged tokens are not forced to maintain a constant leverage level.
2. Can I withdraw Binance Leveraged Tokens to my wallet?
At present, it cannot be transferred to any other wallet. You can only securely store your assets on your Binance account.
3. Can you sell leveraged tokens?
You can sell leveraged tokens typically like any other crypto asset on your regular crypto exchange.
4. Is leveraged crypto risky?
Yes, it is risky if you are not an expert trader, but it suits you if you have deep knowledge of the crypto market, leverage, margin, options, and perpetual futures trading.