A leveraged token is a financial derivative that enables you to gain exposure to a leveraged trading position in a digital asset without the complexities of managing a margin trade. The token exists exclusively on the Ethereum blockchain as an ERC-20 token. Each token represents a leveraged long or short position in a crypto asset. The beauty of these crypto derivative tokens lies in the fact that traders are not required to deal with the headache of collaterals, funding rates, margin management, and liquidation. The tokens’ simplicity and ease of use explain why they have received so much attention since the white paper was released in March 2019.
Most likely, you have heard of leveraged exchange-traded funds (ETFs). For example, several ETF companies offer leveraged investments in various stock indices. The most popular leveraged ETF is a 3X SP 500. This type of investment vehicle provides 300% exposure to the SP 500 stock index without the aggravation of dealing with a margin trade. Leveraged tokens work exactly as a leveraged ETF.
Leveraged Tokens Trading
Let’s use Bitcoin as an example. Mary buys 1 BTC leveraged token on her favorite crypto exchange. The purchase price is 8200. Three days later, the price of BTC has increased 15% to 9430. If Mary had made a non-leveraged investment, her rate of return would be 15%. Instead, Mary purchased a 3X long bitcoin token. Therefore, her rate of return was 45%.
Of course, leveraged tokens are a double-edged sword. For example, what if the price of Bitcoin had declined by 15%? Mary would have suffered a loss of 45%.
Leveraged tokens are made possible by the fact that participating crypto exchanges issue (and redeem) these tokens in the form of ERC-20 tokens on the Ethereum blockchain. Additionally, each participating exchange rebalances the tokens daily. This enables the value of the token to be aligned with the value of the underlying digital asset.
Pros and Cons of Leveraged Tokens
Let’s review of few of the advantages and disadvantages of using leveraged tokens.
The Future of Leveraged Tokens
Leveraged ETFs were launched in 2006. During the past 14 years, this product has grown into one of the most successful innovations in the history of the financial services industry. Most likely, leveraged tokens will eventually become an incredibly popular product within the crypto community. Why? Because the vast majority of crypto traders enjoy the volatility of cryptocurrencies. Market volatility is the main reason why many traders have abandoned traditional financial products in favor of crypto. Leveraged tokens simply provide an added layer of volatility and increased profit potential. Of course, as we discussed, these tokens also can cause substantial losses.
Even though cryptocurrencies were officially introduced in 2009, public awareness did not begin in earnest until 2017. The cryptocurrency ecosystem has unveiled some impressive products and services during this short time. The leveraged token is a perfect example. These tokens are a testament to the extraordinary innovation that exists within the crypto universe.
Brief Summary of Leveraged Tokens
- A leveraged token white paper was released in March 2019.
- The token allows ownership of a leveraged position without managing a margin trade.
- Leveraged tokens exist exclusively on the Ethereum blockchain as an ERC-20 token.
- Great similarities can be found between a leveraged token and a leveraged ETF.
- Leveraged tokens hold tremendous profit potential along with the possibility of substantial losses.
- Tokens are rebalanced daily.
- Leveraged tokens are not suitable for long-term investing.
- High probability that leveraged tokens will become a very popular product.