what are leveraged tokens

A leveraged token is a short-term investment vehicle that lets traders reap the benefits of leverage with no margin or liquidation risks. Unlike other leveraged tokens, Binance Leverage Tokens (BLVTs) aren’t designed to maintain constant leverage, rather they are designed to aim for a range of variable leverage. In this guide, you will learn: what BLVTs are, how they work and popular BLVTs.

What are leveraged tokens?

Leveraged tokens are quite popular in the crypto space. There are two key features of leveraged tokens that account for their popularity. One, they offer leveraged exposure to the price of a crypto asset. Two, there’s no risk of liquidation. But these tokens are also popular for another reason: they have also been the subject of intense debate. 

In a predominantly bull or bear market, leveraged tokens are popular as they can potentially offer great returns over a short period of time as long as the market moves in your favor. Unlike other trading products, leverage tokens do not require margin or collateral and have no liquidation risks involved. 

When the market moves in favor of your position, you can potentially maximize your profit with leverage, and if the market moves against, leveraged tokens can help to minimize your losses. However, leverage tokens are suitable only for short-term investments. 

Leveraged tokens were first introduced by the crypto exchange FTX and have since been the subject of intense debate as they have failed to live up to expectations. Binance Leverage Tokens (BLVT) is an attempt to provide an alternative approach to this crypto derivative product. They are offered by Binance and are traded on the spot market. 

What are BLVTs?

Binance Leveraged Tokens are assets traded on the spot market, which allows traders to gain leveraged exposure to a cryptocurrency. Leveraged tokens offer the perks of the futures market to spot traders while reducing the downsides (like the risk of liquidation) associated with futures trading.

When you buy leverage tokens on Binance, you are not actually buying the token itself. Leverage tokens are derivative products (meaning they derive their value from an underlying product). If you trade any of these tokens, you do not own the underlying token (you can trade these tokens without owning the underlying token). For example, you cannot use an Ethereum-leveraged token to pay for fees on the Ethereum network, nor can you use it for Ethereum staking. 

With Binance leveraged tokens, you are simply just betting on the price movements of the underlying crypto asset. These tokens enable traders to bet on the price movements of the underlying cryptocurrency, either up or down. 

How Do They Work?

Unlike other leveraged tokens, BLVTs aren’t designed to maintain constant leverage, rather they are modeled to aim for a range of variable leverage. The leverage just exaggerates the way a token moves. For example, if the underlying token moves one percent, the leveraged token moves a certain percentage depending on the leverage assigned to it. For BLVTs, the movement is anywhere from 1.25x to 4x more than the underlying token. At any given time, based on various factors like market volatility and investor redemptions and subscriptions to the tokens, the real leverage varies within that range.

To really understand how leveraged tokens work, think of an actual coin used in a coin toss involving multiple participants betting on the outcome of a toss. These participants are playing a short-term game where the winners of a bet are rewarded with the money staked by losing wagers. 

For example, say there are 25 participants in the game. Five players bet on heads, and twenty players bet on tails. Let’s assume these players place the same stakes over multiple wagers. If, after multiple betting sessions, there are far more heads than tails, the five players that stuck with heads will be rewarded with the losing stake of the twenty players that stuck with tails. Note that although the participants are betting on the outcome of the coin toss, none of them actually owns the coin. This is an important distinction since we are talking about leveraged tokens. 

Also, there’s a special dynamic of the game: if a player loses a certain percentage of bets, he will be eliminated. To prevent players from getting to the elimination point, the game’s moderator uses a special algorithm to balance their wagering patterns, so the players hardly get to the elimination point. 

Although players are kept from the elimination point, each lost bet means a gain for another player that staked in the opposite direction. So the more a player loses, the less money he is likely to leave with should he decide to quit now. On the other hand, the more you win, the more points you accrue, and the more money you make should you choose to quit the game. 

If you bet on the price of a crypto asset going up and you buy a leveraged token of that asset trading upwards, you will be rewarded if your “bet” turns out right with the money invested by traders who bought leveraged tokens for the same asset trading in the opposite direction. While the risk of liquidation is greatly reduced with leveraged tokens, you can lose money buying them if you make the wrong bet (i.e. if the market goes the opposite direction). 

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The idea of leveraged tokens in crypto is similar to the idea behind leveraged ETFs such as 3x leveraged S&P 500 ETFs. These ETFs are rebalanced every day to maintain three times the leverage ratio each day. By doing this, they significantly reduce the risk of the fund getting liquidated or going to zero. The only way for a 3x leveraged S&P 500 ETF to go to zero is if the S&P goes down by 33% in one day. As long as that doesn’t happen, the S&P could go down 33% over the course of multiple days, and the leveraged ETF won’t get completely wiped out. The daily rebalancing allows for this, and that’s the same idea behind rebalancing with crypto-leveraged tokens.

Binance leveraged tokens use rebalancing but are slightly different from leveraged ETFs. Binance uses a complex and undisclosed algorithm to detect when to rebalance the tokens. Factors determining the rebalance schedule include market volatility and the redemptions and subscriptions to the token at any given time. 

For example, BTCUP and BTCDOWN use leverage that ranges from 1.25x to 4x. The variable leverage serves as a perpetual leverage target for the tokens. BLVTs aim to maximize gains when the price of the underlying asset goes up and minimize the risk of liquidation when the price falls. Leveraged tokens are best suited for trending markets. 

Since the target leverage for BLVTs is variable rather than constant, they are not forced to rebalance except under certain market conditions. 

Leverage tokens can be bought and sold on the Binance spot market. They can also be redeemed for the value they represent. You will be required to pay a redemption fee if you are redeeming a leveraged token. You might find it more profitable to exit your position in the spot market rather than using the redemption process. 

What is BTCDOWN?

BTCDOWN is a leveraged token that moves in an exaggerated way along with the price of the underlying token (Bitcoin). BTCDOWN generates leveraged gains that range from 1.25x to 4x when the price of Bitcoin falls. So if you think Bitcoin is going to fall in price, you can buy BTCDOWN and open a leveraged position. If Bitcoin goes down, you will benefit from that price movement. However, if Bitcoin goes up after you buy BTCDOWN tokens, you will lose money. 

What is BTCUP?

BTCUP is the exact opposite of BTCDOWN. BTCUP allows traders to generate leveraged gains when the price of Bitcoin goes up. With BTCUP you can generate leveraged gains of 1.25x to 4x when the price of Bitcoin goes up. If you think the price of Bitcoin will go up, you can buy BTCUP. If the price of Bitcoin surges, you will benefit from that price movement. 

How do I Trade Leveraged Tokens on Binance?

Not all users are allowed to trade Leveraged tokens by default.

In order to trade Leveraged Tokens like BTCDOWN, BTCUP or others you must take a quiz and activate the assets in your Binance account.

Step 1: Login to your Binance account

Step 2: Go to the market you want to trade. Eg: Trade BTCDOWN

Step 3: Watch the presentation video that explains you what BLVTs are

Step 4: Take the quiz and answer correctly all questions

Step 5: Accept their terms and conditions and submit your answers

To Sum It Up

Leveraged tokens are a good option to get started with leverage trading. They offer leveraged exposure to a crypto asset without the risk of liquidation, which in a way offers the best of spot and futures markets. Popular leveraged tokens offered by Binance include BTCUP and BTCDOWN. Both products allow traders to generate leverage gains when the price of Bitcoin goes up or down.

Updated on: October 24, 2022