Leveraged tokens are a new type of digital asset that can be used to increase the potential return of an investment. They are created by taking advantage of the leverage of a financial instrument such as a margin account or futures contract, and can be traded on various cryptocurrency exchanges. With leveraged tokens, investors can increase their exposure to the underlying asset without having to commit large amounts of capital to the position. In this article, we will explore how leveraged tokens work and how to earn on them.
How are leveraged tokens different from futures?
Leveraged tokens have better price dynamics than futures
In a trend, the token price changes more than the futures price. This means that the holder of tokens will earn more than the holder of futures. To compare the dynamics, we multiplied the prices of ETHUSD from April to September 2020 by 3. This is how we simulated the change in the price of a futures with a leverage of 3x.
Then we compared the price of the ETHUSD futures and the token ETHBULL. The graph shows the difference in dynamics.
In a stable trend, tokens bring more profit than a regular position with leverage
Let’s show an example. On July 21, a trader opened a $1,000 long position on the ETHUSD contract with 3x leverage. At the same time, he invested $1,000 in ETHBULL tokens on the exchange FTX.
The trader held positions for a week. During this time, ETHUSD has grown by 25%.
On July 28, the trader closed positions. Profit on futures was 75.7%, and profit on tokens was 101%.
Exchanges are not liquidating token positions due to rebalancing
One more example. A trader opened a $1,000 long position on the ETHUSD contract with 3x leverage. He then bought ETHBULL for the same amount.
The trader held positions for a week. During this time, the price of ETH was falling by 5% per day.
When the price of ETHUSD fell by 33% from the entry point, the exchange liquidated the futures position. The token position showed a loss of 68% and was not subject to liquidation.
During rebalancing, exchanges shift the liquidation price from the price of the asset at the time the position was reopened. The liquidation of a token with a leverage of 3x will occur only when the price moves by 33% per day.
For example, ETH is worth $300. A trader buys ETHBULL tokens with a leverage of 3x. The liquidation point for tokens is $200. On the first day, ETHUSD closed at $267, a third of the distance to the liquidation point. On rebalancing, the exchange will open a position at $267 and move the liquidation point to $178.
When the price changes by 10% per day, the issuing exchanges launch a forced rebalancing:
- exchange FTX rebalances BULL tokens when the price of the underlying asset changes by 11.5%, and BEAR tokens – when the price changes by 6.7%;
- Pionex exchange rebalances tokens when the actual leverage differs from 3x by 33-66%. This value depends on the type of tokens and the direction of the price change.
On average, exchanges fix losses and push back the liquidation point when the price moves by 11%.
Leveraged tokens are a type of crypto-asset that allow traders to access leveraged returns on their investments. They are an attractive option for traders who want to gain exposure to the crypto markets while minimizing their risk. With the right strategies and research, traders can earn substantial profits on leveraged tokens. Ultimately, leveraged tokens provide an innovative way for traders to access the crypto markets and profit from them.