Things to know about leverage tokens before you invest in it

What are leverage tokens?

As the name suggests, leverage tokens offer investors and traders a leveraged position while trading cryptocurrencies. This means all gains or losses get multiplied using these tokens. Compared to traditional trading methods, leveraged tokens are generally ERC-20 tokens, offering leverage to token holders. Leveraged tokens provide traders with convenience as they do not need to pay any attention to the margins or understand the concept of liquidation risk. 

Top crypto exchanges like BYDFi offer leveraged token trading and make different cryptocurrencies available to both retail and institutional crowds. Compared to margin trading, leverage tokens expose traders to leveraged trade positions without facing any liquidation or collateral risk. Traders do not necessarily need to worry about the risks associated with leveraged trading, such as the effects of premiums, funding rates, price movements in futures and perpetual contracts, or more.

Should you HODL or Scalp leverage tokens?

Leverage tokens offer traders an opportunity to multiply their profits by magnifying the effects of price movements. For beginner traders, this can be an excellent way to make money in the shortest amount of time. However, it is important to remember that leveraged tokens are highly volatile and can make it difficult to hold them for a longer period of time. The volatile nature of crypto and the additional risks of magnified price actions make holding onto leveraged tokens quite risky for traders. 

Leveraged tokens are better utilized in the short term, where traders purchase them in the hope that the price will rise or fall soon. Once the expected price movement occurs, traders can take out their investments. Holding onto leveraged tokens for a long time after the expected price has been reached can lead to reduced profits. Additionally, leveraged tokens may incur considerable management fees, making it infeasible to hold on to them for a long time. Generally, leveraged tokens have a management fee of 0.05% per day, which may add up to more than 10% of the investment over a year.

Strategies to acquire profit from leveraged tokens

Leveraged tokens are traded like any other digital currency but function differently from regular crypto tokens or coins. These tokens allow investors to multiply their gains if they can correctly bet on rising or falling prices. It is important to note that a change in the crypto asset’s price leads to a change in the price of the leveraged token based on the amount of leverage.

Pros of choosing the BYDFi platform for leveraged token trading

BYDFi has recently introduced 12 leveraged tokens on its platform for popular digital currencies. This has made BYDFi one of the best crypto exchanges with a wide range of leveraged tokens available on the market today. With the 12 new leveraged tokens, the BYDFi exchange aims to empower its users with a more diverse trading opportunity and varied options to capitalize on price movements. 

The platform supports a wide spectrum of major cryptocurrencies for leverage trading, including BTC, ETH, LINK, DOT, AAVE, ATOM, ADA, AVAX, BCH, DOGE, BNB, EOS, LTC, FTM, MATIC, NEAR, UNI, TRX, and SHIB as per our BYDFi exchange review. This expanded selection of leveraged tokens allows traders to access leveraged positions on their choice of digital assets, optimize their trading strategies, and enhance their ability to benefit from crypto price fluctuations. The new BYDFi leveraged tokens have 3x short and 3x long positions, providing users with added flexibility in their crypto trading strategies.

Risks involved in leveraged tokens and how to prevent them

While trading any financial instrument, the most obvious risk that traders are faced with is loss. If they bet on the wrong asset and price actions, they will certainly lose much more than they would have if they had not taken the leveraged position. Losses tend to be massive, especially for varied leveraged tokens, where traders do not have any fixed positions. While liquidation risk is much lower due to rebalancing, there is no guarantee that it will not happen if the crypto market conditions are adequately rough.

One of the significant risks surrounding leveraged trading is called volatility decay. Volatility decay negatively impacts the highly volatile crypto market on investments. For instance, if a trader buys ETH worth $100 and the price increases by 20% in 24 hours, it gives him $120. However, the next day, the price may decrease by 20%, and the trader may lose $24, leaving him with $96.

Now considering a leveraged position, let’s say the same trader buys ETHBULL worth $400. This is a 3x long leveraged token. On the first day, the price rises by 20%, giving him $160. The next day, it falls by 20%, leaving him with $64. This means the trader loses more assets than he would have because of his leveraged position. 

Note that this example is extreme, but it reflects the fact that even the smallest losses can eat away assets faster than regular crypto trading. Moreover, leveraged tokens have additional fees compared to regular digital currencies. They may have management fees ranging from 0.01% to 0.05%, along with a redemption fee if the traders choose to claim their assets’ value instead of selling their leverage tokens.

Conclusion

To wrap up, investors can participate in leveraged trading on BYDFi exchange with a wide range of leveraged tokens without any liquidation risk. Trading leveraged tokens allows traders to take their leveraged positions in the market and multiply their gains. However, trading leverage tokens may not be beginner-friendly, considering the risks that may quickly lead to substantial losses. However, if the traders bet in the right direction on crypto price movements, it can drastically boost their profits. Hence, it is important for traders to carry out extensive research before putting their money into leveraged tokens.