Hello brothers!
In today's article, I will introduce to you an extremely innovative financial product that is Leveraged Token (Leveraged Token). Understanding and capturing it will be a great opportunity for you in the Trade Margin Crypto.
So what is Leveraged Token? Brothers and sisters follow the article offline!
Leveraged Token (or Levered Token):
- Is an ERC20 token on the Ethereum network.
- Understand simply that Spot Trading + Margin Trading.
- Created for Trader to have an additional option to seek profit in the Crypto market.
Maybe you are interested in: What is Margin Trading? Should newbies use Margin Trading?
Types of Leveraged Token?
FTX is the exchange that created Leveraged Token.
Currently, Leveraged Token products are used on many other major exchanges such as Binance, FTX, Gate.
There are currently 3 types of Leveraged Token used on FTX: BULL (+ 3x), BEAR (-3x) and HEDGE (-1x).
If ETH increases by 1% in a day, then ETHBULL increases by 3%, ETHBEAR decreases by 3% and ETHHEDGE decreases by 1%. If ETH is down 1% in a day, then ETHBULL is down 3%, ETHBEAR is up 3% and ETHHEDGE is up 1%.
Advantages and disadvantages of Leveraged Token
In the process of learning about Leveraged Token, I realized that this is an extremely creative and useful derivative product but not a perfect product. It still has its advantages and disadvantages as follows:
Advantages
Easy to use
Leveraged Token has the same trading style as the brothers trading on Spot Trading. Overall it is very easy to use.
The way to make a profit is similar to Spot Trade, you buy Hold and sell when the price is high to find profit.
Cheap transaction fee
Leveraged Token transaction fees are usually cheaper than Contract Trading and Future Trading.
The relevant transaction fees when trading Leveraged Token brothers are: Trading Fees (divided into 0.02% Maker & 0.07% for Taker) and daily management fee of 0.03% / day (FTX).
For example: If you buy ETHBull worth $ 1000 and hold it for 30 days, the fee you incur is the transaction fee (0.02% when you buy and 0.07% when you sell) plus 30 x 0.03 management fees. daily logic. Total of 0.99% range for 1 month.
While Contract Trading and Future have a more expensive fee. For example when brothers Trade Contract on Snapex, when you hit x10 and Hold 30 days, the fee can pay up to 13.5%.
No liquidation
One advantage of Leveraged Token is that they don't burn when the price drops too much. If you trade Contract, with leverage x3, the BTC price only needs to decrease by 34%, your assets will be liquidated or called fire and you will lose money.
With Leveraged Token Bull Bear it is similar to brothers trading with x3 leverage. Due to the daily rebalancing mechanism, your assets will not burn.
That asset can be divided into 2 and 3 but in theory, you can still remove the gauze when the market is in the right direction for you to analyze.
Defect
Complex calculations, difficult to understand
Although there is a simple use like Spot Trading that he often uses to trade Crypto on exchanges, but the calculation from Spot Trading's price to Leveraged Token's price is quite complicated, confusing and subject to many impacts. verb a few other factors.
If you do not understand enough about Leveraged Token, which case to use, which case not to use, it can lead to large losses. After all, this is still a Crypto product related to Leveraged Token.
Below is a table with some advantages and disadvantages of Leveraged Token.
How Leveraged Token works
In this section, I will introduce to you how Leveraged Token works.
In the short term, you can use the x3 milestone to visualize Leveraged Token.
There are currently 3 types of Leveraged Token used on FTX: BULL (+ 3x), BEAR (-3x) and HEDGE (-1x). If ETH increases by 1% in a day, then ETHBULL increases by 3%, ETHBEAR decreases by 3% and ETHHEDGE decreases by 1%. If ETH is down 1% in a day, then ETHBULL is down 3%, ETHBEAR is up 3% and ETHHEDGE is up 1%.
But in fact, Leveraged is much more complicated than that. It has 2 laws to rebalance prices:
- Rebalance (equilibrium) prices at 2h UTC (9h GMT + 7).
- Or rebalance (balance) the price when the underlying asset price fluctuates more than 10% during the day.
To make it easier for you to understand, I will give you some examples for you to understand.
Rebalance (rebalance) price at 2h UTC (9h GMT + 7)
This is the first price rebalance law of Leveraged Token. It will rebalance the daily price to ensure a 3X position for the token, the time of the 2h UTC milestone (9am GMT + 7).
Case 1: Price increased by 10% on the day.
- If you Trade Margin x3 or Perp x3, your profit is 3 x 10% = 30%
- With ETHBULL, in this case you still have a profit of 3 x 10% = 30%.
Case 2: Price increased by 10%, 5% before 2pm UTC and 5% after 2pm UTC
- Brothers Trade Margin x3 or Perp x3, your profit is still 3 x 10% = 30%
- With ETHBULL, in this case your profits will be calculated (1 + 3 x 5%) x (1 + 3 x 5%) -1 = 32.25%.
In the second case, if the price before 2 hours UTC price is increasing by 5%, then the profit is 15%. Until 2pm UTC, the position is rebalanced. If the price is increased by 5% at that time, the interest will be paid to 15% of the previous sum (a type of compounding).
Rebalance (rebalance) the underlying asset price when the price fluctuates more than 10% during the day
The above case applies when prices fluctuate as low as or equal to 10% a day. What if prices fluctuate above 10% a day?
Now we have a second rebalancing law: Rebalance (rebalance) when prices fluctuate more than 10% during the day.
Case 3: Price increase by 15% / day
- If you Trade Margin x3 or Perp x3, your profit is 45%
- With ETHBULL, in this case, your profit will be: (1 + 3×10%) x (1 + 3×5%) – 1 = 49.5%
Similar to the case of 15% / day discount.
- If you Trade Margin x3 or Perp x3, you lose 45%
- With ETHBULL, you will lose: (1-3×10%) x (1-3×5%) -1 = – 40.5%
You can understand the second equilibrium law of the type of the underlying asset price (in this case, the price of ETH) that fluctuates by more than 10% in 1 day (before 2pm UTC), the value of your money decreases by 30% calculated on the original amount of brothers. The position will then automatically rebalance.
Some notes when Trade with Leveraged Token
Here are some notes for you when Trade Leveraged Token.
In the normal fluctuating market (5 – 10% / day), the Leveraged Token transaction has the same results (in the short term) with the Contract x3 transaction.
Based on the calculation formula, you can see, if the market fluctuates low, your trading with Leveraged Token will produce similar results when Trade Contract x3 or Margin x3. This gives you one more option.
But, this only happens in the short term, guys, because we have the law to rebalance by the day. The small but cumulative changes become a major change in the results.
So Trade with Leveraged Token when there is a trend, not suitable for Sideway
From the 2 position balancing formulas that I have shared above, it can be seen that Leveraged Token is suitable for trading when the market tends to be clear, not suitable for Sideway.
When Trend is on the right track in the long run, your profit is usually more than x3.
Consider exiting when the price fluctuates sharply, up and down more than 10% / day
Just like the previous hour increased by 20% but the next hour decreased by 20%, according to the position balance formula, you will lose. So when the price fluctuates so you should not trade Leveraged Token.
To better understand you can refer to the video below:
summary
In this article, I have explained to you what leveraged tokens are (Leveraged Token) and overview of their advantages.
I also explained the two rules of Rebalance (position balance) of Leveraged Token, as well as some notes when brothers Trade with Leveraged Token. Hopefully the article will help your investment process.
If you have any questions, don't hesitate to leave a comment below the article. Me and the team Coin98 will answer to you soonest.
Hello and see you again in the next article!