Leveraged tokens are vulnerable to volatility decay, which refers to the divergence in the returns between the underlying cryptocurrency and the leveraged token. The amplification of the daily price movements of the underlying asset is the main reason for their high volatility. Leveraged tokens are considered among the riskiest instruments in the crypto market due to their high volatility. These tokens are designed to maintain a variable leverage range between 1.25X and 4X.Īccording to Binance, the variable target leverage maximizes profitability on the upswing and minimizes losses on downswings. Variable target leveraged tokens are issued by Binance – the world’s largest crypto exchange by volume. For example, leveraged tokens at a constant leverage of 2X will always multiply the daily percentage change by 2. These are conventional leveraged tokens that maintain constant leverage to the underlying asset. There are mainly two types of leveraged tokens: Leveraged tokens were popularized by centralized crypto exchanges such as Binance and FTX. Traders are advised to proceed cautiously when using leveraged tokens, as the risk of heavy losses is significant. The risk-reward ratio of leveraged tokens is very high due to its volatility. However, if the price of ETH falls by 10%, the 2X long leveraged token for ETH will decrease by 20%. If the price of ETH increases by 10%, the 2X long leveraged token for ETH will increase by 20%. Leveraged tokens are designed to multiply the percentage price movement of the underlying cryptocurrency.įor example, a 2X long leveraged token for ethereum (ETH) will produce two times the percentage change of ETH’s price movement. These tokens are used to leverage long and short positions and for hedging against market volatility. Leveraged tokens are used by traders with the aim of multiplying gains from token price movement.
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