As cryptocurrency investing has developed, new categories of tradable assets have become accessible, one of which is called leveraged tokens. Leveraged tokens have attracted the interest of investors with a high-risk tolerance, and are taking the market by storm.
However, you shouldn’t jump into buying and trading leveraged tokens right away without first learning how leveraged tokens work and getting ahold of crucial information before buying these risky assets. In essence, you can take a leveraged position in a cryptocurrency with the help of a leveraged token, which multiplies your gains or losses, which makes leveraged tokens incredibly risky assets that you need to thoroughly understand before ultimately deciding to invest in them.
To make things easier for you, here are five things you need to know about leveraged tokens before you invest in them.
Target Leverage Is Maintained By Rebalancing Leveraged Tokens
A goal leverage, such as three times the underlying asset, is established for each leveraged token. For that reason, most tokens with leveraged ratios frequently rebalance. In times of excessive volatility, the exchange that offers the token could additionally incorporate mechanisms that make it rebalance as quickly as feasible.
However, be aware that leveraged tokens on some exchanges function somewhat differently. These exchanges come with a goal leverage range rather than a specific target leverage.
Margin trading is frequently complicated and demands careful management on the side of the investor. On the other hand, leveraged tokens are a straightforward alternative that doesn’t require you to take any action.
You shouldn’t be concerned about margin or collateral. Due to rebalancing, the chance of liquidation is relatively low. It is unlikely that the token will be destroyed even if its value decreases because it will sell off some of its position.
They Can Experience Volatility Degradation
Volatility decay, or the adverse effects of volatility on the investment, is one of the main dangers associated with leveraged tokens. The comparison method is the most effective way to understand this idea.
Let’s say you decide to acquire $100 worth of Bitcoin because you’re interested in doing so. Your investment is now worth $110 after the price has risen by 10% over a day. On the other hand, the price drops by 10% the following day, or $11. Your financial commitment would be $99.
What would happen if you put $100 into a leveraged token that tripled the profits on Bitcoin? That would raise the 10% growth from day one to day three by 30%, increasing your investment to $130. On day two, though, there would also be a 30% reduction, costing you $39 and leaving you with $91. A token with leverage makes a small loss on a regular cryptocurrency buy into a much bigger loss. Volatility decay destroys your money even with modest back-and-forth price changes.
Numerous Cryptocurrency Exchanges Don’t Sell Them
As only a few cryptocurrency exchanges do sell leveraged tokens, it can be hard to purchase them. So, how can you purchase leveraged tokens if your crypto exchange doesn’t support them? Well, using another cryptocurrency exchange as an “on-ramp” to deposit money and then transferring those assets to the exchange that trades leveraged tokens is a common technique. Here is how that would happen:
- Money should be deposited into an exchange that supports it.
- Buy a cryptocurrency you’ll send using that money. A frequent option is stablecoins like USD Coin (USDC).
- Transfer your cryptocurrency to a platform that supports leveraged tokens.
- After that is complete, you can exchange the transferred cryptocurrency for leveraged tokens.
They Are a Rapid Investment Option for Traders With Experience
Because of their decreasing volatility and high administration costs, leveraged tokens are not a good long-term investment option. Because of the volatile nature of cryptocurrencies, there is a considerable chance that you will incur financial losses if you keep leveraged tokens in your possession.
The majority of them are wagers that you should make based on whether you believe the price of the underlying cryptocurrency will rise or fall in the near future. You have the potential to dramatically improve your gains if you purchase a leveraged token and are correct about its trajectory.
Because of the inherent risk, using leveraged tokens is not recommended for beginners. It is possible that you will lose a large portion of your investment very quickly.
The bulk of investors would be better off buying cryptocurrency and keeping it in their portfolios. They already have an adequate amount of volatility, so introducing leverage, which amplifies the effects of each price fluctuation, is unnecessary.
If you are interested in leveraged tokens, it is highly recommended that you conduct extensive research on them before making any investments and that you only spend money that you can afford to lose.