update 19 August 2021

FTX Leveraged Tokens: What are They and How do They Work?

Trading cryptos take several forms depending on the level of experience and the knowledge or skill possessed by a trader. One such form of trading cryptos is leveraged tokens. Leveraged tokens are quite similar to ERC20 tokens in that they can be held, transferred, or traded to any other token. The major distinguishable feature of leveraged tokens is that they offer leveraged exposure to crypto assets without having to worry about collateral, margin, liquidation prices, or any other issue encountered in regular margin trading.

This guide will delve into FTX leveraged tokens, getting into the details of how they function, the risks involved, and a few trading tips. 

What are FTX Leveraged Tokens?

As discussed above, leveraged tokens are basically ERC-20 tokens but with leveraged exposure to crypto. They offer traders a simplified mechanism of getting leveraged access to crypto assets. FTX issues and redeems leveraged tokens, which are traded on several exchanges, most notably Poloniex.

There are three FTX leveraged tokens for every future on FTX: BULL(+3x), BEAR(-3x), and HEDGE(-1x). For instance, in the case of ETHBULL-a 3x long ETH token, if ETH goes up 1% during a day, then ETHBULL goes up 3%, ETHBEAR goes down 3%, and ETHHEDGE goes down by 1%. On the contrary, if ETH goes down 1% during a day, then ETHBULL goes down 3%, ETHBEAR goes up 3%, and ETHHEDGE goes up 1%. 

Leveraged tokens function via price actions generated by trading FTX perpetual futures employing the creation and redemption mechanism. If, for instance, you’re creating $5 000 of ETHBULL. To do so, you’ll need $5 000 in your ETHBULL account on FTX to buy $15 000 worth of ETH perpetual futures. This is because ETHBULL is 3x ETH. 

You can also redeem leveraged tokens for their net asset value. This is done by sending $10 000 of ETHBULL back to FTX and then regaining it. In turn, the tokens will be destroyed since the ETHBULL account will need to sell back $30 000 worth of futures, and $10 000 will be credited to your account.  

Benefits of Using Them

There are three major cases where you should use leveraged tokens I .e, manage risk, managing margin, and ERC20 tokens. 

  • Managing Risk – Using your leveraged token position, you can automatically make money by reinvesting profits into the underlying asset. This is achieved through the 3x leveraged positions. Leveraged tokens can also reduce risks by averting liquidation. For instance, if you buy ETHBULL, leveraged tokens will automatically sell off some of its ETH in the case of a market crash, in turn, avoiding liquidation.
  • Managing Margin -It’s possible to buy leveraged tokens like regular ERC20 tokens on a spot market. You only need to spend $10 000 on ETHBULL and acquire a 3x leveraged long coin instead of managing collateral, margin, liquidation prices, or something of the sought.
  • Reinvesting Profits – A significant benefit of leveraged tokens is that they can reinvest their profits. If the tokens have positive PnL, they are likely to increase their position size. ETHBULL is better than +3xETH since it reinvests the accrued profits in a single trade day into ETH. However, it poses a considerable risk due to increased market exposure.   
  • ERC20 Tokens – Leveraged tokens being ERC20 tokens means that you can directly withdraw the tokens from your account, unlike margin positions. You need to access your crypto wallet and send leveraged tokens to any ETH wallet. You can also custody your leveraged tokens and trade them on platforms that list the leveraged tokens, such as Gopax.      

Risks Associated with Trading

Trading in leveraged tokens involves higher risk as compared to any other spot markets due to intense volatility. These tokens can lose substantial amounts of their value in a single trading day. They perform differently than regular leveraged exposure. While the target leverage can be achieved each day thanks to their rebalancing process, they cannot be sustained over the long-term. Therefore, it’s crucial to exercise caution when trading leveraged tokens. 

How to Buy/Sell Leveraged Tokens

There are three primary ways of buying/selling leveraged tokens, as discussed below. 

  • Spot markets – Spot markets present the easiest and most recommended way of buying a leveraged token. You can simply head out to the ETHBULL/USD spot market and buy or sell back ETHBULL. To find a leveraged token’s spot market, access the tokens page, and click on the token name or click on the underlying future on the top bar plus the market’s name. 
  • Convert – You can buy or sell leveraged tokens using the ‘CONVERT’ function directly on your wallet page. 
  • Creation/Redemption – While it’s not a recommended method, you can create or redeem leveraged token by going to the tokens page and clicking on the ‘more info’ tab.

Final Word

FTX leveraged tokens are ERC-20 tokens that enable crypto traders to access FTX’s perpetual futures with up to 3x leverage. For every future on FTX, there are three leveraged tokens available- BULL for long positions, BEAR for short positions, and HEDGE for hedging against the market direction. While trading leveraged tokens involves some benefits, they’re quite complicated and require a considerable risk. In simple terms, leveraged tokens enable crypto traders to trade many more coins than they own. 

price change

The primary problem with leveraged tokens is that they devalue with time as markets fluctuate up and down and are not ideal for long-term holding

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