Leveraged Tokens: Everything You Should Know Before You Buy Them

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The crypto market has dramatically grown in the past couple of years and this topic is getting increasingly popular. Some have already invested in it and know a lot about it, while others are still thinking about it and want to learn more. 

In the forex and stock markets, there has become a demand for leveraged crypto products.
These very interesting crypto derivates are leveraged tokens. They are hybrid investment products that have become popular recently. 

A leveraged token permits you a leveraged position, which means that your earnings (or losses) are multiplied. If you want to know more about them and think about investing, keep reading.

What exactly are leveraged tokens?


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As previously said, leveraged tokens are crypto derivatives you can invest in. Each one is a basket of endless contract positions and its price reflects the change in the nominal value of those positions and the leverage that you choose. Since they are not the same as perpetual contracts, this means that there is no due date. 

Leveraged tokens traders receive higher profits than trading in the spot market. They are recognized by using the ticker name of the underlying cryptocurrency. This is the number that shows leverage and the trade direction (long or short).

In short, these tokens are a way to magnify returns and losses by borrowing money. They let you access leverage without dealing with collateral or liquidation (where the loss is greater than the investment and the platform has to sell your position). 

That way, traders can trade higher and bigger, and by determining the market direction, they increase their profit potential.

They automatically rebalance

The leverage of these tokens is automatically rebalanced and they’re not constant like traditional tokens. They have algorithms that control the rebalancing, and this is created to establish the correlation between them and the underlying assets. 

Also, leveraged tokens are affected by leverage volatility decay since they can’t copy the underlying crypto’s performance for long. If you have a $1,000 worth of ETH, an increase means that now it is worth $1,100. But, if it drops 10% tomorrow, your holding will be $990. These fluctuations sometimes happen on a daily level so your investment will be affected. 

Short-term investment (you’ll pay fees)


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If you buy ETH and the price increases, you will likely make a profit no matter what happens daily. But buying an ETHBULL token means magnifying that impact of fluctuations, which can cost you long term. 

Like the exchange-traded funds (ETFs), the leveraged tokens have a management fee. You will have to pay daily fees, which may not appear huge, but adding up can be costly. The management fee is about 0.045%, charged every day at about 23:45 (UTC). 

While the leveraged tokens are perpetual contracts, which means they don’t have an expiration date and you can have them for as long as you need. But when you consider the fact the volatility decay impacts them heavily, with the additional fees involved, no one thinks about them as long-term investments.

While the crypto market is naturally volatile and your business can benefit from cryptocurrencies, holding these opens the risk of losing money. You can lose more money by holding tokens than crypto, so don’t consider them anything more than short-term investments.

Should you invest in leveraged tokens?

You need to understand leveraged tokens completely to invest in them. Knowing the risks, you’ll know what to do and what to avoid when it comes to these trading products. They are made for investors who have more experience in the crypto world, and they are known as the most misunderstood products in the crypto market’.

Research about how rebalancing works on the platform that you plan on using, as they differ and you don’t want to risk and lose significant amounts of money. You also need to know that it’s not easy to buy leveraged tokens as most US cryptocurrency exchanges don’t sell them at all. And an unregistered exchange also means additional risks.

Short-term trading in the market is more demanding than investing long-term. Leveraged tokens are risky and volatile, so take time to research currencies that are likely to perform well in the next couple of years. 

Conclusion

While these tokens are an amazing way to trade with leverage and they don’t have an expiry date, consider them as short-term investments only. With knowing all the risks, you’ll be more likely to succeed and not worry about losing money on them.

By investing money carefully, it’s more likely that you won’t be disturbed by daily fluctuations. Be cautious, broaden your horizons, think about investing in leveraged tokens, and never invest more than you can afford to lose.

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