Definition of Leveraged Tokens
Leveraged tokens are creative assets that can leverage exposure to cryptocurrency markets without all the nitty-gritty of managing a leveraged position.
And they were initially introduced by derivatives exchange FTX but since then.
They take remain listed on other exchanges. And FTX leveraged tokens are ERC-20 tokens issued on the Ethereum blockchain.
And the idea that we can get into the leveraged position without worrying about collateral, margin, funding rates.
Also liquidation. However, it must note that FTX leverage tokens can lose significant value in the sideways and zig-zag market.
Also, they are generally not intend for long-term holding. So make sure we understand the mechanisms before exposing ourselves to financial risk.
Since leveraged tokens are on the blockchain, they allow similar functionality as other tokens.
It means that we can buy, store, and transfer them like any other token while leveraging exposure to the underlying asset.
For example, consider bull, the token that represents the 3x long exposure to the price of Bitcoin.
If the price of Bitcoin goes up 1%, BULL goes up 3%. Conversely, if Bitcoin goes down 1%, the cost of BULL goes down 3%.
Also, the inverse of the BULL token is the BEAR token, which represents a 3x short exposure to the price of Bitcoin.
Such, if the price of Bitcoin goes down 1%, the BEAR token goes up 3%, while if Bitcoin goes up 1%, BEAR goes down 3%.
The idea behind any leveraged token is essentially the same, but for different tickers, direction, and leverage.
How do FTX Leveraged Tokens Work?
- Each leveraged token represents leveraged exposure. These tokens can issue and redeemed through FTX but can trade on other markets, like any other ERC-20 token.
- And let’s say we can like to issue 100 USD worth of ETHBULL, the token that represents the 3x long exposure to ETH.
- Also we send 100 USD to issue the token, and the account representing the token will open the 300 USD position on the ETH/USD perpetual futures market on FTX.
- And think of this account as the trading bot that takes care of our leveraged position for us.
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