What are leveraged tokens and how do they work?
Leveraged tokens are ERC20 assets that provide leveraged exposure to cryptocurrency markets directly rather than through managing leveraged futures positions.
Each leveraged token is designed to respond to the movement of the coin they are attached to. For example, BULL is +3x and BEAR is -3x. This means, for every 1% BTC increases, BULL will increase by 3% and BEAR will decrease by 3%.
Leveraged tokens are priced based on the trading of FTX perpetual futures. Each leveraged token holds the amount of futures contracts necessary to maintain the target leverage ratio.
For example: For $10,000 of notional value of BULL, the BULL account on FTX buys $30,000 worth of BTC perpetual futures in order to generate a leverage ratio of 3x.
Why use leveraged tokens?
Leveraged tokens create a more simplified leveraged trading experience. By rebalancing each day (described below), leveraged tokens have a comparatively lower risk of liquidation as compared with traditional leveraged trading using futures contracts. To participate in leveraged tokens, users just need to buy and sell tokens. There is no managing margins or collateral or liquidation prices as with leveraged trading.
Additionally, leveraged tokens are ERC20 tokens. They can be withdrawn like any other token, something that cannot be done with a leveraged position.
What is rebalancing and how does it work?
Rebalancing occurs every 24 hours at 00:02:00 UTC to maintain the leverage target for the token (e.g., BULL tokens maintain a leverage of 3x). The leveraged tokens rebalance by either reinvesting profits if money was made or selling some of its position if money was lost. Tokens can also rebalance when they reach 4x leveraged, even if that occurs within the 24-hour window.
It is important to remember that the token’s target leverage is based on the time of rebalancing. Outside of that time, the leverage level of the token can fluctuate until it is rebalanced to the target leverage 24 hours later. As a result, any particular leveraged token may not generate the exact price movement as its target (i.e., for any given 24 hour period, the leveraged token my generate more or less than the target return based on its leverage ratio – specifically, BULL may generate more or less than 3x the price movement of BTC in any given 24 hour period).
What influences the performance of leveraged tokens?
Within a single day, leveraged tokens are designed to perform based on their target leverage – BULL should move 3x as much as BTC, for instance – just as a position with the same leverage would. However, over multiple days a leveraged token will not perform the same as a static position.
The principal price of the leveraged tokens changes between days as a result of rebalancing. This means consecutive days of market change will compound on the rebalanced amounts. Consecutive days of increases, for instance, will result in higher prices than a static position. Similarly, multiple days of decreases will have smaller loses as some of the position is sold off each day, making the principal smaller.
As a result, leveraged tokens are highly subject to both momentum and price direction.
What do leveraged tokens hold?
Leveraged tokens hold FTX perpetual futures which sets both their pricing and direction.
What are the fees?
Leveraged tokens have a built-in daily maintenance fee of 0.03%. This fee is charged by FTX to the leveraged token direct and is paid from the assets held by the leveraged tokens. Bittrex Global trading and transaction fees for Leveraged Tokens work just like any other token on the platform. All fees can be found on the Bittrex Global Fees page.
Who can use leveraged tokens?
Leveraged tokens are only available through Bittrex Global and to Bittrex Global users located outside of the European Union (EU) and European Economic Area (EEA).
Bittrex Global (Bermuda) Ltd. is licensed to conduct digital asset business activity by the Bermuda Monetary Authority