What are Leveraged Tokens?
Leveraged tokens are ERC20 tokens with leveraged exposure without taking care of the margin, requirements, management, and liquidation risk. In other words, Leveraged tokens are the easiest way to do leverage trading.
They maintain fixed or variable leverage. In traditional leveraged tokens, the leverage is rebalanced at 2:00 am every day and when the spot market price changes by 10%.
- Leveraged Tokens enables you to gain exposure to leveraged trading positions without maintaining margin, collateral, management, and risk.
- They offer fixed, and variable leverages. Additionally, the rebalancing mechanisms help in maintaining the target leverage range.
- Leveraged Tokens are not designed for holding.
- Pionex offers leveraged tokens with an optimized rebalancing mechanism. They have designed specific rules to trigger rebalancing.
- Binance provides Binance Leveraged Tokens (BLVT) that have variable leverage between 1.25x and 4x.
- BLVT leverage is not publicly visible, and they do not rebalance themselves periodically. These tokens are listed only on Binance.
- FTX was the first exchange to introduce leveraged tokens (Bull Token and Bear Token). They offer leverage up to 3X. They have defined clear rules to trigger rebalancing and calculating the price of the token.
Pionex Leveraged Tokens offer high leveraged exposure with an optimized rebalancing mechanism. They provide variable target leverage that fluctuates within a specific range according to the crypto asset price. The rebalancing is triggered if the leverage exceeds a particular limit.
They use the “Coin + Leverage + Long/Short” nomenclature for Pionex Leveraged Tokens. For example, ETH3L indicates ETH 3X Long.
The leverage is calculated using the formula –
Leverage = current price * the leverage of the order/ the price of the order + the leverage of the order *（current price - the price of the order）
Let’s take an example to understand this better –
Imagine if you used 3X Long ETH and the price is 10,000USDT. The leverage will be 3x = 10000*3/10000+3*(10000-10000).
Now, if the price increases to 11,000 USDT the leverage will be 11000*3/10000+3* (11000-10000)= 33000/13000 = 2.5385x.
Therefore, if the price goes down, the leverage increases, and if it goes up, the leverage decreases.
Rebalancing is used to increase or decrease the exposure to achieve the target leverage. There are rules defined to trigger the mechanism.
In traditional leveraged tokens, the rebalancing is triggered at 2:00 am and when the spot market price changes 10%.
The rebalancing mechanism of Pionex Leveraged coins works as follows –
- 3x Long Pionex Leveraged Tokens: The leverage can fluctuate within 2.2X-4.8X, but if it exceeds this, it will be rebalanced to 3X.
- 3x Short Pionex Leveraged Tokens: The leverage can fluctuate within 1.8X-4.8X, but if it exceeds this, it will be rebalanced to 3X.
- 1x Short Pionex Leveraged Tokens: The leverage can fluctuate within 0.75X-1.5X, but if it exceeds this, it will be rebalanced to 1X.
The funding fee of Pionex Leveraged Token is 0.03% per day. Therefore, the token price will decrease by 0.03% every day at 16:00 (UTC). The price of the leveraged token depends upon the funding fee, spot price, and rebalancing.
Reverse Split on Pionex Leveraged Tokens
Pionex uses a Reverse split on some of its Leveraged tokens if its net value is lower than 0.05 USDT. This is done to avoid the impact of precision and assist users in their trading.
The Reverse Split Ratio decides the number of shares that will be merged. For instance, if the ratio is 1/10, then ten shares will be merged into one. The net value per share will also be ten times.
There is prior information of the date and time in which the reverse split shall take place. All the running bots and manual orders are stopped/canceled during this duration.
To learn more read our comprehensive Pionex review.
Binance is one of the best crypto exchanges in the market. It offers Binance Leveraged Tokens (BLVT), tokenized versions of leveraged futures positions. They represent a basket of open positions on the perpetual futures market.
Features of Binance Leveraged Tokens (BLVT)
- You cannot withdraw BLVT from your wallet. In other words, you can only store BLVT’s in your Binance account.
- They provide variable leverage. The exact target is not publicly visible to avoid traders to anticipate rebalancing events. The tokens do not balance periodically but only when the market conditions are necessary.
- Binance tries to maintain leverage between 1.25x and 1.5x.
- The Net Asset Value ( NAV) is the value of BLVT in USDT.
- They focus on maximizing the returns when the price goes up and minimizing liquidation risks when the price goes down.
- The redemption and subscription limit of each BLVT is different.
- You can check your subscription and redemption history.
Binance Redemption Fees
There are two options to exit your position.
- Sell BLVT in the spot market.
- Redeem the value of your BLVT’s in USDT. However, you have to pay a redemption fee of 0.1%. Redemption is expensive in most cases and is used in extraordinary situations.
There are four leveraged tokens for every future on FTX: BULL (+3x), BEAR (-3x), HEDGE (-1x), and HALF. However, some futures may have leveraged tokens with other margin ratios.
Leveraged Tokens get their price by trading FTX perpetual futures. For example, if you buy BTCBULL for $1000, the BTCBULL account on the exchange buys $30,000 BTC perpetual futures.
There are three different ways to buy/sell Leveraged Token using FTX
- Spot Market
- Exchange coins
- Creation or Redemption of a Leveraged Token. This method is not recommended because you don’t know what price you will receive unless you have completed the process.
FTX recommends using the SPOT market to buy and sell leveraged tokens.
Leveraged tokens rebalance every day at 2:00 AM UTC. Therefore every day, each token reinvests profits if made any. If it loses money, it sells off some position to regain its leverage to avoid liquidation risk. Also, if the leverage reaches 33% higher than the target, it rebalances.
If any leveraged token reaches leverage of 4X, the rebalancing mechanism is triggered. Then, FTX calculates the units they have to buy or sell to return to 3X leverage. They use the following three formulas to achieve this-
- Desired position (DP): [Target Leverage] * NAV / [underlying mark price]
- Current Position (CP): current holdings per token of the underlying
- Rebalance size: (DP – CP) * [LT tokens outstanding]
After calculating, FTX sends orders to FTX perpetual futures order book for rebalancing. They send a maximum of $4M of orders per ten seconds until the desired total size has been sent.
These may have rounding errors. The above explanation ignores fees and the rounding errors between the underlying price when a rebalance is triggered.
Leveraged Tokens: Risk and Benefits
- They are high-risk products. You can be at a loss if you don’t have enough knowledge about Leveraged Tokens before investing in them. It is not advised for beginner traders.
- Leveraged Tokens are rebalanced daily and hence are not advised for long term holding.
- The transparency offered by leveraged tokens depends on the exchange you are using.
- They offer leveraged exposure without managing margin trade, liquidation, collateral, and funding rates.
- Allow you to take advantage of market volatility.
- They automatically reinvest your profits and sell some of them if the market is down to avoid liquidation risk.
Leveraged Tokens: Conclusion
Leveraged tokens provide leverage exposure without worrying about management and other risks.
Pionex Leveraged Tokens provide high leverage with optimized rebalancing techniques. All the rules for calculating leverage to rebalancing mechanisms are transparent to its traders. Above all, they also reverse split on some tokens to smoothen the trading experience.
Binance offers Binance Levraged Tokens (BLVT) with variable leverage. The variable leverage (1.25x – 4x) is not publicly visible. They are listed only on Binance and cannot be withdrawn to your wallet from your Binance account.
FTX offers four leveraged tokens for every future. They calculate their price by trading FTX perpetual futures. They rebalance at 2:00 UTC every day and when the leverage reaches 33% higher than the target.
If you want to get leverage without worrying about all the nitty-gritty of leverage trading then Leveraged tokens are built for you.