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. 

Btc
Bitcoin
$42.083
price
4.44098%
price change
BUY NOW

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

More posts

Can You Gamble with Crypto in Las Vegas

Las Vegas is best known for gambling with an enormous concentration of world-class casinos and hotels. This entertainment hub situated in the State of Nevada attracts thousands of tourists across the world to experience the glamour and gambling life. Following the massive growth of Bitcoin in recent years, Las Vegas has increasingly embraced it, with widespread use, especially as a mode of payment for dining, rent, cars, etc. Over fifty businesses in Las Vegas, Nevada accept cryptocurrency as a mode…

Cases of the Longest Bearish Price Trends in the Crypto Market

The crypto world's decade-long existence has not been flawless. Like in any other market, there is always a bear trend that leads to massive losses. The 2008 market crash is one of the biggest bear markets in the financial world, and others occurred in the following years.  Crypto has seen cases of long market crashes as well, some lasting over a year. This guide will be looking into 5 of the must-know crypto market crashes. Furthermore, it will highlight the…

Who will enter the CryptoSphere first: Amazon or Facebook?

Amazon and Facebook are some of the biggest technology companies in the world and have long been the main drivers of tech innovation across the globe. These two companies have substantially impacted billions of internet users, whether it's through Facebook's pioneering and massively successful social media platform or Amazon’s enormous e-commerce platform and cloud computing services.  Both Amazon and Facebook have made several steps in the cryptosphere pushing for the adoption of cryptocurrencies and blockchain technology. In fact, Facebook and…

What Really Happens When Swapping Cryptos?

The process of swapping cryptocurrencies can be somewhat complex. Sometimes, you may end up lacking the exchange assets you need. For instance, you may want to exchange BTC for ZIL. Generally, there are very few exchanges that support direct BTC to ZIL exchanges. Therefore, in many scenarios, an individual will have to find a BTC trading pair. Exchange the BTC to another pair connected to ZIL, then complete by exchanging the second asset to Zil. Generally, following the whole exchange…

Could Brexit be the Underlying Reason for Developing The Digital Euro

After the election in December 2019, the British Parliament decided to ratify the withdrawal from the European Union. Factors that influenced Brexit included immigration, sovereignty, anti-establishment politics, among others. Could Brexit have influenced the development of the digital Euro? Read on to find out as we break down factors that led to the development of digital currency. The Growth of Digital Assets The concept of digital assets is not novel; its penetration and influence have left no stone unturned. The…

What Are Crypto Validators and How do They Work?

Crypto Validators are new "payment processors" in decentralized networks, and as such, they produce blockchain rewards. It sounds simple, doesn’t it? However, the definition of validators in crypto is much more complex than that. Also, the role of a validator may change depending on the consensus mechanism that each blockchain uses. In this guide to validators in blockchain, we take a closer look at this entity and its indispensable role. Furthermore, we analyze four validator use cases in different blockchains…

How Many ETH Will Burn After the London Fork?

Since its launch in July 2015, Ethereum has grown exponentially to be the second leading cryptocurrency in market value after Bitcoin. The platform’s growth has primarily been attributed to its smart contract feature, which powers the deployment of a wide range of applications, including oracles, decentralized finance (DeFi), decentralized exchanges (DApps), marketplaces, crypto-collectibles (NFTs), and developer tools.  Despite its growth, Ethereum faces numerous challenges that hinder its usability. The scalability challenge is one of the biggest ones that Ethereum faces. The current state…

The Impact of Adoption of Cryptocurrencies on E-commerce Business

E-commerce is the short form of electronic commerce. It is the buying and selling of merchandise over the internet networks. It also involves the transfer of funds and the keeping of records to certify the transactions made. E-commerce is of three types; business-to-consumer (B2C), business-to-business (B2B), and business-to-government (B2G). The main reason for using cryptocurrencies in e-commerce is to get rid of third parties that control the transactions. This relationship can make online shopping much easier and safer since blockchain technology that backs up cryptocurrencies is…

What it Means to Make Bitcoin a Legal Tender

June 9, 2021, marks the first move that would make history in Bitcoin's timeline. El Salvador passed a bill where 62 of 84 congressional voters would make Bitcoin a legal tender. Fast forward to September 7, and El Salvador became the first country to make Bitcoin a legal tender. In this article, we shall look into what it means for Bitcoin to be a legal tender in detail; What is Legal Tender? "This note is legal tender for all debts, public and…

The Correlation Between Blockchain Activity and Transaction Fees

Miners and validators are essential cogs in any crypto project. They're the ones who process transactions on a blockchain (BC) activity. For their efforts, crypto projects compensate them for their efforts from transaction fees. A transaction is only valid when it has undergone validation. The process ends in the validators adding it to the BC. Mining consumes a lot of computing power. As such, it's an energy-intensive exercise. The motivation for the miners is the block reward that consists of…