Introduction
What is leverage token; Leveraged tokens are usually cloned versions made to increase leverage for an original token like BTC, ETH, or DOT. A leveraged token’s goal is to raise its price, which traders use to estimate their potential gain and loss. However, it is crucial to remember that risk is associated with trading leveraged tokens to increase profit. Losses may occur quickly, and the token may lose all of its value if the price of the original version is positioned against the leveraged token.
Leveraged tokens are, therefore, typically regarded as a more sophisticated trading instrument and are not advised for new traders. Leveraged tokens typically make investments using borrowed funds in the underlying asset. If a 2x leveraged token for Bitcoin were to be created, 50% of its value would be used to buy Bitcoin, and the other 50% would be borrowed to purchase additional Bitcoin. If the price of Bitcoin increased by 10%, the 2x leveraged token would aim to increase by 20%.
How does the leverage token work?
Central exchanges create a leveraged token that tracks the performance of the original coins, like Bitcoin or Ethereum. When a user makes a leveraged token transaction, the exchange purchases the underlying coins with the user’s money and stores them in a collateralized account. The exchange then gives the borrower’s money to the trader so they can buy the original asset’s leverage and the amount of leverage to increase the exposure of the leveraged tokens.
The price of each leveraged token will swing with the price of an underlying asset. For example, a 2x leveraged token increases by 2%, meaning the underlying coin will increase by 1%, while a 3x leveraged token increases by 3%, representing a 3% increase in the underlying coin.
Pros
Escalates profits
If the price changes of the underlying coins behave as expected by traders, leveraged tokens will be very advantageous for traders. A 5x leveraged token, for instance, would aim to increase by 5% for every 1% increase in the underlying coins.
Leverage facility
The exchanges offer leverage for those types of traders to make a profit quickly if they have extensive experience in the cryptocurrency industry but few assets to trade; this facility is more convenient for experienced traders.
Convenience
Leveraged tokens are a convenient way to boost profits without the need for other complex trading strategies because they can be traded like conventional cryptocurrencies.
Availability
Various exchanges offer leveraged tokens by providing different cryptocurrencies and varying leverage levels, allowing traders to adjust their expertise to the market for variable profit.
Cons: What is leverage token?
Amplified losses
As was already mentioned, leveraged tokens are also susceptible to severe losses if the value of the original token or coin moves in the opposite direction of the leveraged token’s position.
Decay
Exchanges rebalance leverage tokens daily to maintain their borrowed money vulnerability, which can cause their price to decay over time, particularly during periods of high price volatility.
Complexity
Due to their lack of due diligence and ignorance of the risks involved, novice traders should refrain from using leveraged tokens. Even though it may be more challenging than spot trading, seasoned investors can manage the leverage risk.
Liquidity
Buying or selling leveraged tokens quickly may not be accessible when prices diverge from expectations because they don’t always have high liquidity.
10 Mistakes to Avoid When Trading Leveraged Tokens
For traders and investors, the following is a list of 10 blunders to avoid while trading with leveraged tokens:
1. Not understanding the risks
Trades should be made after thoroughly understanding leveraged tokens’ risks and potential rewards.
2. Overestimating profits
Never overestimate your potential profits when trading leveraged tokens. The traders must conduct their due diligence, adopt a practical strategy for generating a sufficient profit, and refrain from chasing unrealistic increases.
3. Ignoring decay
Before developing trading strategies, traders must carefully consider the price decay factor and conduct extensive research because leveraged tokens are designed to track the performance of the underlying tokens.
4. Trading too frequently
Overtrading can be harmful, rendering the leverage token useless and eventually wiping out profits. The best traders follow a well-written trading plan and avoid impulsive decisions.
5. Using too much leverage
Trading professionals should consider whether appropriate leverage can result in a profitable trade. Using too much leverage can increase risk and losses.
6. Not using stop-loss orders
Stop-loss orders can limit losses if the market deviates from your forecasts. Traders should use stop-loss orders to safeguard their positions and prevent unnecessary losses.
7. Ignoring liquidity
Low liquidity in some leveraged tokens can make it challenging to transact quickly. Liquidity is something that traders should be aware of and incorporate into their trading plans.
8. Following the crowd
Traders should refrain from following the herd or succumbing to hype or FOMO. It’s crucial to have a clear trading strategy and adhere to it.
9. Neglecting to diversify
To manage risk in any investment portfolio, diversification is essential. Diversifying a trader’s holdings across various coins or tokens reduces the risk of catastrophic losses and keeps them from putting all their eggs in one basket.
10. Not doing enough research
Before investing in leveraged tokens, traders should perform extensive research and analysis. They ought to be knowledgeable about the original asset, the market circumstances, and any news or events that might impact the asset’s price.
Famous leverage tokens and their exchanges
There are several widely used leverage tokens available on exchanges. Here are a few examples:
BTCUP and BTCDOWN
These two tokens, BTCUP and BTCDOWN, which have 3 x leverage, follow the bitcoin price and are accessible on many exchanges, including Huobi, FTX, and Binance.
ETHBULL and ETHBEAR
These are Ethereum price-tracking, 3x leveraged tokens. In addition to Huobi, FTX, and Binance, they are accessible on several exchanges.
LINKUP and LINKDOWN
These 3x leveraged tokens track the price of Chainlink and are available for trading on numerous exchanges, including Huobi, FTX, and Binance.
XRPBULL and XRPBEAR
These tokens have a 3x leverage and track the price of XRP (Ripple). They are available on several exchanges, such as Huobi, FTX, and Binance.
SOLBULL and SOLBEAR
These 3x leveraged tokens monitor Solana’s price. They can be purchased on various exchanges, including FTX and Binance.
UNIBULL and UNIBEAR
These tokens, which have a 3x leverage, track the price of Uniswap. Several exchanges, including FTX and Binance, offer them.
LEOBULL and LEOBEAR
These 3x leveraged tokens track the price of the LEO token that Bitfinex is selling. They’re reachable through Bitfinex.
OKBBULL and OKBBEAR
These three times leveraged tokens rely on the price of OKB, the native token of the OKEx exchange, to determine their value. On OKEx, they’re accessible. Click this link, If you want to read in Binance Leverged token.
Conclusion
What is leverage token; In conclusion, leveraged tokens are a sophisticated financial tool that allows traders to experience amplified gains or losses. They are made to provide leveraged exposure to an underlying asset while tracking its performance over a brief time frame, usually one day. Leverage tokens with different leverage ratios, like 2x or 3x, are available for trading on various exchanges. Although they can be used to increase returns in a trading strategy, they carry a high risk of decay and the possibility of margin calls.
Traders should carefully research and understand the risks before investing in leveraged tokens. They should have a laid-out trading strategy, employ suitable risk management techniques, and avoid common errors like overestimating profits or failing to diversify their investments. Leveraged tokens can be a valuable tool for seasoned traders who are aware of the risks and potential rewards. Still, they are not recommended for inexperienced traders or those with low-risk tolerance.
Leveraged tokens can be risky and are typically considered a more sophisticated trading instrument. They are vulnerable to volatility and risk suffering sizable losses if the underlying asset’s price changes contrary to the leveraged token’s position. Before trading leveraged tokens, traders should thoroughly understand the risks and potential rewards.
FAQs:
1. Can you make money with leveraged tokens?
A type of cryptocurrency derivative known as leveraged tokens enables traders to obtain leveraged exposure to a specific cryptocurrency without dealing with the difficulties of margin trading. Although there is a chance for high returns with leveraged tokens, their significant risks are resolved, making them unsuitable for all investors.
If you can correctly forecast the price changes of the underlying cryptocurrency, you can make money with leveraged tokens. If the price of Bitcoin increases, you could purchase a leveraged token that offers 2x leverage, which means that if the price of Bitcoin increases by 10%, the leveraged token will increase by 20%.
2. What does leveraged mean in crypto?
In the context of cryptocurrencies, leverage refers to using margin or borrowed funds to raise the potential return on investment. Using leverage enables traders to manage a more significant position than they could if they only used their money. Leverage allows traders to take control of a more critical position, such as $20,000 or $30,000, if they want to buy bitcoin worth $10,000 but only have $1,000.
Leverage is frequently expressed as a ratio showing how much the trader borrows concerning their capital, such as 2x or 3x. For instance, a 2x leverage would imply that the trader is in charge of a position twice as prominent as their capital.
3. What are the benefits of leveraged tokens?
Leveraged tokens are a cryptocurrency derivative that can provide traders with leveraged exposure to a specific cryptocurrency without dealing with the complications of margin trading’s many advantages. The following are some of the main benefits of leveraged tokens:
i. Simplicity
Leveraged tokens can be traded on many well-known cryptocurrency exchanges and are made simple to use. Traders can use leveraged tokens without understanding margin trading or complex trading strategies.
ii. Convenience
Unlike other cryptocurrencies, leveraged tokens can be bought and sold, and traders don’t need to deal with the complications of margin trading or the requirements for margin. Due to this, traders looking to increase their exposure to a particular cryptocurrency through leverage may find leveraged tokens a more convenient option.
4. Is leverage bad for crypto?
Although it doesn’t necessarily make leverage bad for cryptocurrencies, it can raise market risk and volatility. Traders effectively increase the amount of capital invested in the market by using leverage to take more significant positions. As a result, there may be an increase in market volatility and price swings as substantial amounts of money move in and out of the market according to traders’ positions.
Leverage may also raise the possibility of margin calls and liquidations. A trader may need to add more money to their account to keep a leveraged position open, or the position may be automatically liquidated if the market moves against them. The trader may suffer sizable losses, and the market may become unstable.