Leveraged Tokens

What Are Leveraged Tokens?

Leveraged tokens are a form of cryptocurrency derivative that enables traders to obtain leveraged exposure to specific cryptocurrencies without the need to handle margin requirements. They are created to offer traders a simplified method for trading leveraged positions in cryptocurrencies, enabling them to take leveraged long or short positions without the necessity of continually managing their margins.

How Leveraged Tokens Work

Leveraged tokens typically operate by utilizing an algorithm to automatically adjust the token's leverage based on the price movement of the underlying cryptocurrency. This means that if the price of the underlying cryptocurrency rises, the token's leverage also increases, and vice versa.

For instance, a 3x long leveraged token for bitcoin seeks to deliver three times the daily percentage change of bitcoin’s price movement. Therefore, if BTC rises by 1%, the leveraged token should increase by 3%. Conversely, if BTC falls by 1%, the leveraged token should decrease by 3%.

Key Advantages of Leveraged Tokens

There are three primary reasons for utilizing leveraged tokens, which arise from the key advantages that leveraged tokens offer:

- Risk management: Leveraged tokens are advantageous for managing risks as they automatically reinvest profits into the underlying asset and take appropriate actions, such as waiting for the price to decrease before selling. This helps to avoid liquidation.

- Margin management: Investors can attain a leveraged position without needing to consider features like margin, collateral, or liquidity. This means that one can acquire the 3X Long Bitcoin Token by spending the exact price of the token.

- ERC-20 tokens: In most cases, leveraged tokens are based on the ERC-20 standard, enabling them to be withdrawn at any time. This means that the holder can transfer their tokens to any Ethereum wallet or supported platform, unlike when holding a margin position.