Yzcozy
6 min readJan 20, 2022

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UNIVERSAL LEVERAGE; LEVERAGE TOKEN, LEVERAGE TRADING.

LEVERAGE TOKEN

Unlike in a Forex trades where broker suggests you a way to benefit on Forex – leverage. Leverage is a borrowed capital for an investment provided by a broker and amplified returns from a trade. As the standard leverage is 1:100, you may deposit only $1,000, and the broker will cover the rest. Similar to crypto leverage, let dive further in more leverage opportunities in crypto.

Leveraged tokens give you leveraged exposure to the price of a cryptocurrency without the risk of liquidation. This way, you can enjoy the enhanced gains that a leveraged product can give you while not having to worry about managing a leveraged position. This means you don’t have to manage collateral, maintain margin requirements, and of course, there’s virtually no risk of liquidation.

The initial design of leveraged tokens was introduced by derivatives exchange FTX. These tokens have been a highly debated topic, especially because they don’t perform as you would expect on a longer-term basis. The Binance Leveraged Tokens (BLVT) proposed an alternative design.

What are Leveraged Tokens (LVT)?

Leveraged Tokens (LVTs) are tradable assets on the spot market. Each LVT represents a basket of open positions on the perpetual futures market. So a LVT is essentially a tokenized version of leveraged futures positions.

The first available LVTs are BTCUP and BTCDOWN. BTCUP aims to generate leveraged gains when the price of Bitcoin goes up, while BTCDOWN aims to generate leveraged gains when the price of Bitcoin goes down. These leveraged gains amount to between 1.25x and 4x.

Currently, Leveraged Tokens are only listed and tradable directly on Exchanges where they are listed, and you won’t be able to withdraw them to your own wallet. Please note that Leveraged Tokens aren’t issued on-chain.

Why use Leveraged Tokens?

One of the main sources of confusion around leveraged tokens is thanks to a concept called volatility drag. In simple terms, volatility drag is the detrimental effect that volatility has over your investment over time. The greater the volatility and larger the time horizon, the more significant the effect of volatility drag is on the performance of leveraged tokens.





What is Leverage Trading in the Crypto?

Leverage trading is a practice that allows trading assets by using additional funds provided by a third party. Leverage accounts give traders access to more capital. This means that traders can leverage their positions. In essence, leverage trading strengthens trading positions, and traders can realize larger gains on successful trades.

As mentioned above, traditional markets fund leverages by using an investment broker. What about providing these funds in the crypto market? This is usually done by other traders. Their motivation is to earn interest on the funds borrowed for leverages. In some cases, the exchange is the party that provides leverage funds to traders.

Imagine this scenario.

KIM is a happy Cattle rearer. She has obtained a good return by rearing and selling cattle. Kim wants to expand the scale of her cattle plantation, so she proposes to borrow some money from his neighbour Maleek to purchase more male and female cattle. Part of the cattle will be paid to Maleek in return of the borrowed money.

This is where Leveraging starts. Now imagine that Kim owns 1,000 USDC at the beginning, and Kim uses her 1,000 USDC and the 1,000 USDC borrowed from Maleek to purchase more cattle for rearing. The 1000USDC borrowed from Maleek will generate 10% interest and be returned to Maleek at the stipulated time. In this case, on the premise that Kim only owns 1,000 USDC, she can enjoy the income generated by nearly 2,000 USDC.

This is leverage with 2x leverage.

Not every investment will have a good return. When Kim proposed to borrow USDC from Maleek, Maleek made such a trade-off: If he does not lend those USDC, then he will always have 1000 USDC assets; If he lends with USDC, he will enjoy 10% (100 USDC) interest every stipulated time, but if Kim fails in rearing cattle or the cattle price drops, in the worst case, she will not be able to repay the principal or even the interest. In order to ensure the safety of his assets, Maleek and Kim reached an agreement that if the value of Kim’s cattle drops to a certain amount, Kim will sell all cattle and return Maleek’s 1,000 USDC.

This is the leverage with liquidation.









Leverage trading is a powerful tool in the hands of experienced crypto traders. Is it different from margin trading? If it is, how?

Trading means buying and selling assets with the aim of making a profit.

Institutional trading looks at buying and selling stock, shares, and fiat currencies. Since we’re here for all things crypto, trading virtual currencies means buying and selling digital assets. Although the tradable assets differ, the purpose remains the same in both worlds – getting a return on your original investment.

What is Leverage?

To better understand leverage trading, we need to start with the very basics.

Leverage is an investment strategy that implies using borrowed funds to amplify returns from an investment. In other words, you borrow capital – or take on debt – to potentially make an investment.

Traders mostly use leverage to increase their buying power in the market.

What is Margin?

Margin basically refers to the assets borrowed from a third party to make an investment. So, buying on margin literally means borrowing funds to buy assets.

What is Margin Trading?

To clear the confusion, leverage refers to taking on debt, whereas margin is debt used to invest in other financial instruments, such as cryptocurrencies. The two terms are very similar yet different. The main difference is that margin is expressed as a percentage deposit required, while leverage is expressed as a ratio.

The terms leverage trading and margin trading – and their many variations – are mostly used interchangeably. Margin trading uses exactly the same principle as using leverage. In fact, it is margin that’s used to create leverage.

Short vs Long Positions

Now that you’ve learned the basics of what leverage trading is, let’s get a little bit more technical. Leverage trading is quite universal. This means you can use it to open short and long positions.

Short Position

Traders use a short position when they predict that the market is going to move down. Basically, they are betting against an asset instead of for it. A short position often turns a temporary decrease to the trader’s advantage and can be used with or without leverage. For example, a trader believes the crypto market is heading downwards. S/he predicts that the price of bitcoin will experience a major decline. So, the trader decides to short it by using leverage. Therefore, s/he borrows funds to amplify the trade and sells BTC. In case the predictions were correct, the market begins to decline, i.e., the price of bitcoin drops. The trader can now use the profit s/he made from the trade to pay back the leverage and the fees and buy back more bitcoin.



Long Position

On the other hand, traders use a long position when they believe that the market is heading towards an increase. They either bet that the price of a certain asset or the entire market will continue climbing. Consequently, the profits are made from the price appreciation and selling at a later date.

How to Mitigate Risks in Leverage Trading

Being a financial activity, any kind of trading involves risks. As such, it is important to know where you stand to make the right decision.

Leverage trading is riskier than regular trading. This is because traders take on debt to make an investment. So, the borrowed funds need to be returned along with interest. Cryptocurrency prices can be wildly volatile, that is why it’s crucial to take some safety precautions.

Knowing the market and having technical analysis skills will not eliminate the risks completely. However, they will give you a much steadier base for leverage trading.

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