6 things to know before buying leveraged crypto tokens
As cryptocurrency investing has evolved, new types of tradable assets have become available. Leverage crypto tokens are the ones that have caught the attention of investors with a high tolerance for risk.
A leveraged crypto token allows you to take a leveraged position in a cryptocurrency, which means your gains or losses are multiplied. For example, a token called 3X Long Ethereum Token (ETHBULL) triples the profits of a Ethereum investment. So if Ethereum increases by 1%, its value increases by 3%. It works the same if Ethereum drops in price.
People often buy leveraged crypto tokens without fully understanding how they work. To avoid an investment you will regret, there are several things you should know before you buy.
1. Rebalancing leveraged crypto tokens to maintain target leverage
Each leveraged crypto token has a target leverage, such as three times the underlying asset. To maintain this leverage, the token will rebalance automatically. If he earns money, those profits will be reinvested. If he loses money, he will sell part of his position.
Leverage crypto tokens typically rebalance on a daily basis. The exchange that offers the token may also have triggers that cause it to rebalance as soon as possible during times of high volatility.
Note that leveraged tokens with the Binance exchange works a little differently. Instead of a specific target leverage, they have a target leverage range. For example, some Binance Leveraged Tokens have a target leverage range of 1.25 to four times the price of the asset.
2. They are popular for their simplicity
Margin of negociation is generally complex and requires active management by the investor. Leverage crypto tokens, on the other hand, are a simple alternative that doesn’t require you to do anything.
There is no collateral or margin (money borrowed from a broker or crypto exchange) to worry about. The risk of liquidation is very low due to rebalancing. Even if the token loses value, it will sell part of its position, making it unlikely to be wiped out.
3. They are sensitive to the degradation of volatility
One of the biggest risks of leveraged crypto tokens is the drop in volatility or the negative impact of volatility on the investment. The best way to understand this concept is with a comparison.
Let’s say you are interested in buy bitcoin, so you buy $ 100. After one day, the price has increased by 10% and your investment is worth $ 110. But the next day, the price drops 10%, which would be a drop of $ 11. Your investment would be worth $ 99.
What if you invested $ 100 in a leveraged token that tripled Bitcoin’s returns? This would turn the 10% increase on day one into a 30% increase, bringing your investment to $ 130. But that would also lead to a 30% drop on the second day, costing you $ 39 and leaving you with $ 91. A minor loss on a normal crypto purchase becomes a much larger loss on a leveraged token.
Even with weaker back and forth movements, lower volatility eats away at your investment.
4. Many crypto exchanges don’t sell them
Buying leveraged crypto tokens can be a process, especially for US residents. They are only listed on some cryptocurrency exchanges, and some of these exchanges do not allow you to deposit cash.
So how can you buy leveraged crypto tokens? One popular method is to use another crypto exchange as a “ramp” to deposit money and then transfer those funds to the exchange that sells leveraged tokens. Here is how it would work:
- Deposit money into an exchange that allows it, like Coinbase.
- Use these funds to buy cryptocurrency that you will transfer. Stablecoins, like the USD coin (USDC), are a popular choice.
- Transfer your crypto to an exchange with leveraged tokens, such as KuCoin or Gate.io.
Once done, you can exchange the crypto you transferred for leveraged tokens.
Decreasing volatility is an issue with holding leveraged crypto tokens. Another is that they usually have additional management fees. Here are the management fees for two popular types of leveraged tokens:
- Binance Leveraged Tokens have a daily management fee of 0.01%.
- FTX Leverage Tokens have a daily management fee of 0.03%.
These might seem low because they are daily rates, but consider how much they would cost you over the course of a year. Binance leveraged tokens would cost 3.65% and FTX leveraged tokens would incur a management fee of over 10%.
6. These are short term investments for advanced traders
Due to the drop in volatility and management fees, leveraged crypto tokens are not a long-term investment. Cryptocurrency is volatile, so if you keep leveraged tokens there is a good chance that you will lose money.
These are primarily investments to be made if you are sure that the price of the underlying cryptocurrency will rise or fall soon. By buying a leveraged token, you can dramatically increase your profits, assuming you are correct in which direction the token is going.
The risk involved also means that leveraged tokens are not suitable for beginners. You can lose a significant portion of your investment very quickly.
For most investors, it is best to buy and hold cryptocurrencies. They are already sufficiently volatile without adding leverage which amplifies each price movement. If you are interested in leveraged crypto tokens, spend a lot of time researching them first and only put in money that you would be comfortable losing.
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Lyle daly owns Bitcoin, Ethereum, and USD Coin.
We strongly believe in the Golden Rule, which is why the editorial opinions are our own and have not been previously reviewed, endorsed or endorsed by the advertisers included. The Ascent does not cover all the offers on the market. Editorial content for The Ascent is separate from editorial content for The Motley Fool and is created by a different team of analysts.Lyle daly owns shares of Bitcoin and Ethereum. The Motley Fool owns shares and recommends Bitcoin. The Motley Fool has a disclosure policy.
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