> Blog > What are Leveraged Tokens?

Published July 21, 2022

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Leveraged tokens are just one of the multitude of ways in which crypto traders can utilize their funds to create larger returns. As implied in their name, leveraged tokens are simply tokens that allow traders to have a leveraged position when trading. Leveraged tokens create larger buying power from a smaller initial position, thus increasing the potential gains, as well as losses, when trading with them.

Let’s dive into why leveraged tokens exist and how you can utilize them.

What is the Purpose of Leveraged Tokens?

Most leveraged tokens come in the form of ERC-20; tokens that are built for programming on the Ethereum blockchain. Leveraged tokens can enhance a trader’s ability to make profit, but that’s not the only reason for their existence. Leveraged tokens can help boost demand for a given crypto project, thus increasing liquidity and ensuring more healthy and efficient price discovery, which is the primary function of a market.

In addition to improving the market’s efficiency, leveraged tokens offer a few other benefits.

Managing Risk

Unlike margin trading, leveraged tokens let traders open leveraged positions without needing to put up any collateral of their own, thus also removing the risk of liquidation. They let traders carry the benefits of leveraged trading without having to worry about price fluctuations in the perpetual contracts market and other associated risks.

Managing Margin

Since leveraged tokens simply multiply gains and losses without requiring the trader to put down collateral, managing margin with leveraged tokens is much easier and less stressful than traditional margin trading since traders don’t have to worry about maintaining a margin.

How is Leverage Calculated?

Leveraged tokens multiply the percentage gains (and losses) of a given token. For example, on FTX, you can buy the ETHBULL leveraged token, which serves as a 3X long ERC-20 Ethereum token. Since this token is a 3X long token, any percentage increases or decreases in Ethereum’s value will earn or lose you three times as much.

Let’s say Ethereum is trading at $1,000, and you purchase $1,000 of the ETHBULL token in anticipation of Ethereum’s price rising. If Ethereum then pumps 10% to $1,100, you will net a reward of 30%, or $300. Conversely, if Ethereum drops 10% to $900, then you will lose 30%, or $300.

Though leveraged tokens literally multiply your opportunity, they come with significant risks, as losing your capital is just as easy as increasing it. You won’t have to worry about liquidation, however, as the token is programmatically designed to increase gains and losses without needing to put up real collateral, as is the case with traditional margin trading.

Rebalancing

It’s also important to be aware of leveraged token rebalancing. Leveraged tokens usually carry a leverage amount between 0.25X and 4X. In order to maintain this leverage, the token goes through rebalancing. This process happens at predetermined times of the day – these times may vary, so it’s important to understand the rebalancing times of the exchange that you are trading on. However, if the market is particularly volatile and prices fluctuate by at least 10%, leveraged tokens are rebalanced automatically.

When leveraged tokens are rebalanced, the profits are rolled into the underlying asset, unless you have losses, in which case a part of your position is sold to cover the losses.

How to Buy and Sell Leveraged Tokens

Buying leveraged tokens is relatively simple. As long as the crypto exchange you are on supports leveraged tokens, then you can trade them with no restrictions. Some of the largest crypto exchanges that offer leveraged tokens include:

  • com
  • Binance
  • KuCoin
  • Pionex

Keep in mind when buying leveraged tokens that exchanges typically enforce extra trading fees, which vary by exchange. There management fees, which can range anywhere from 0.01% to 0.03%, and redemption fees as well, which are incurred when claiming the value of the underlying token rather than selling leveraged tokens.

Leveraged Tokens Summarized

While leveraged token trading comes with greater risk, it can also offer greater rewards by amplifying your potential returns. Leveraged tokens offer a new way to reap the benefits of margin trading without having to worry about putting up collateral or risking liquidation. It’s a more flexible day trading strategy that may be better suited for traders, depending on their needs and preferences.

FTX.com offers one of the best trading platforms to trade traditional cryptocurrencies as well as their leveraged token counterparts. By trading on FTX, you are also supporting the exchange’s mission to promote effective altruism. With every trade made on the platform, FTX pledges 1% of its trading fees to investments in humanitarian-focused initiatives.

To get involved, sign up for an FTX account today or join the FTT DAO, a community of passionate FTX fans in support of FTX’s mission.

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