How to play with Cryptocurrency Leveraged Tokens and make 100x more money.
How to play with Cryptocurrency Leveraged Tokens and make 100x more money.
The first thing to be clear about why a lot of users choose leveraged tokens (LT) is that LT removes the need for users to make the trade-off between liquidation risk and potentially high returns. Unlike leveraged trading, users can have a leveraged position without any collateral, maintenance margin, or fear of liquidation risk. This simply means that when the market price of the coin rises by $1, you can make $3 using leveraged tokens, but when the market price of the coin falls by $1, the leveraged tokens will also lose $3. Big gains come with big risks.
The point that LT is criticized by most users is that if a $100 investment loses $10%, only $90 remains; if it makes a profit of $10% the next day, it only makes a profit of $10% on top of the $90, which ultimately only reaches $99. If the portfolio suffers a loss, it needs more profit than the loss amount to reach break-even. lt is by nature such that such losses are unavoidable, and because of the leverage, this corrosion is doubly magnified. This also results in higher wear and tear on the LT compared to traditional margin leveraged products, and once the LT suffers a loss, higher gains are required to break even.
Despite its flaws, the demand for leveraged tokens continues to grow among global users, and the Coin Leveraged Token (BLVT) was launched to address this pain point.
I.What are the advantages of the Coin Leveraged Token (BLVT)?
Firstly BLVT differs from traditional LT in that BLVT uses floating leverage with target leverage multiples kept between 1.25x and 4x, designed to reduce the impact of volatility decay.BLVT is less affected in markets that have very little upside or downside, following market momentum, also performs better. Asset prices may change, but the value of BLVT is not significantly impacted by market volatility. This means that over a reasonable period of time, compared to LTThe likelihood of the BLVT value converging to zero is low. Therefore, in the long run, BLVT'sPerformance is more likely to be better thanTake BTC leveraged tokens as a comparison, according to Coingecko data, most BTC shorted LTs have tended to zero in value. Leveraged tokens will inevitably go to zero due to volatility decay, but using floating leverage will reduce the wear and tear of volatility decay.
Secondly, traditional LT requires daily position adjustments to maintain the target value. However, BLVT will not force position adjustments unless there is an extreme market, and will only do so if it needs to maximize returns when the market is rising, or if it needs to achieve a minimum loss to avoid liquidation. This ensures that the token value will maintain correlation with the value of the underlying asset.
What's more, since Coin On is the sole issuer of BLVT and the sole liquidity provider, this ensures that users can trade tokens efficiently and complete transactions at an acceptable price; and Coin On leveraged tokens offer lower transaction fees, with BLVT's daily management fee as low as 0.01%, or only 3.5% annualized, while other tokens can have daily management fees as high as 0.03%.
As you can see, the Cryptocurrency Leveraged Token is a much safer investment vehicle compared to traditional leveraged token trading. It provides users with the option to expand their interests and reduces the amount of trading capital exposed to risk, and can even be profitable when market momentum is strong.
Second, leverage trading in the "minefield" of easy to step on the pit
Leveraged trading is easy to operate and yields significant returns when the market rises, but "potholes" still exist and caution is needed when entering.
1. Long-term holding of leveraged tokens is a "ticking time bomb"
As explained above, you can understand that leveraged tokens are not a suitable choice for long-term investment. Affected by factors such as market direction and position adjustment, leveraged tokens have very serious unknowns. Gains that were in hand the day before may become bombs whose fuses have been planted after a good night's sleep.
There are more suitable products with higher returns for long-term investments, so be sure not to die on top of leveraged tokens.
2. Market fluctuations can make leveraged tokens "one foot in heaven, one foot in hell"
Volatility is the culprit behind the performance of leveraged tokens being out of sync with the underlying asset. Leveraged tokens certainly enhance returns when the market is rising; however, when the price of the underlying asset falls or volatility increases, losses will be magnified as well. Because leveraged tokens are designed to track price changes in the perpetual contract market at all times, and consequently generate leverage levels up or down. The volatility is therefore also enhanced by the leverage factor.
Bitcoin vs 3x LT Long performance (Bitcoin in blue, LT in orange)
In the example above, we simulated three different market phases. The first phase is a simulated rally with a daily price movement below 10%. During this phase, the value of Bitcoin rises from $100 to $123. Then, the price trend reverses and transitions downward, with large swings ranging from -5% to -12%. As a result, the value of Bitcoin falls from $123 to $76. The final stage was a market recovery, where the value of Bitcoin eventually recovered to its initial price of $100 after bottoming out at $76. As the chart shows, Bitcoin closed unchanged despite a highly volatile performance over a 20-day trading period.
On the other hand, despite following the same price trend as Bitcoin, the 3x LT is still down 23% from its initial value. While many expected the 3x LT to recover, this is not the case as periods of high volatility lead to an effect known as "volatility decay". Volatility decay is the long-term negative impact of volatility on an investment. The higher the volatility and the longer the time horizon, the greater the impact of volatility decay.
This is not only prevalent in cryptocurrency leveraged tokens. We observe the same phenomenon in traditional markets, such as leveraged ETFs that reflect the S&P 500 index.
Performance of the S&P 500 Index and Leveraged ETFs
The chart above compares the S&P 500 ETF (VOO), which tracks the daily performance of the S&P 500, with the 3x bullish leveraged ETF (SPXL). Analyzing the performance of these two securities, we observe that the leveraged ETF outperformed the index during the January-February period. As the index plummeted during the COVID-19 crisis, the leveraged ETF fell even more, as it was tasked with tripling its daily performance. This led to increased losses for investors who purchased leveraged ETFs during this period.
Since April, the S&P 500 has recovered from its collapse and is now positive year-to-date. Meanwhile, leveraged ETFs remain deep in negative territory and are currently down 16.9% year-to-date.
This example shows how absolutely devastating leveraged tokens can be. It also shows the impact of high volatility on leveraged products and explains why leveraged tokens will not necessarily follow the long-term performance of their underlying cryptocurrencies.
While BLVT is designed to reduce the impact of volatility decay by maintaining variable target leverage, in the extremely volatile markets we have seen recently, investors must reduce risk and avoid holding BLVT for long periods of time.
3. Do not ignore the regular position adjustment
Even though Cryptocurrency leveraged tokens will only deploy the position adjustment mechanism in extreme market conditions, once the position adjustment is on, it will result in a difference in performance between the token and the underlying asset. And with the traditional leveraged tokens having daily position adjustments, investors holding leveraged tokens for more than a day will see their exposure expand or shrink dramatically, and their initial investment will be affected.
4. timely stop loss, "surrender the child also can not set the wolf"
The most important thing to avoid in leveraged trading is to be reluctant to exit when you lose money, so that the loss will continue to be magnified in subsequent fluctuations. Leveraged trading is a product of expanding returns, so it is wiser to "run" when you start losing money. Leveraged tokens lose more value over time, and in the event of extreme volatility in the underlying asset, leveraged tokens can lose a large portion of their value.
It cannot be denied that leveraged tokens are powerful tools for short-term trading. For example, ETHUP has accumulated a return of over 290% since it hit the shelves; YFIUP is up 264%; and XRPUP is up 190% overall in a "year-end performance" type explosion.
Leveraged tokens can be a powerful tool for expanding returns when price movements can be correctly predicted. Just the longer it goes on, the more likely this sharp tool will hurt you. So if you want to enter you must fully understand the rules of the game and choose a trading plan that suits you.
Here is a tutorial on the official Cryptocurrency leverage trading
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