How to Use Leverage with FTX
The cryptocurrency market has grown immensely in recent years, with more and more people participating in trade. Leveraged tokens are one of the latest industry innovations that can be a gateway to skyrocket your profits. However, due to the volatile nature of the cryptocurrency world, they can also lead to devastating losses.
Investing in leveraged tokens without a clear understanding of the technology is risky. In this guide, we’ll explain how leveraged tokens work, their benefits, and their drawbacks. Additionally, we’ll list three methods of buying and selling leveraged tokens.
What Are Leveraged Tokens, Exactly?
To utilize leveraged tokens with maximum efficiency, you must first clearly understand how they work. A leveraged token is a digital asset that serves as a multiplier for cryptocurrency. This allows you to earn multiple times more than you would from investing in regular cryptocurrency. However, a multiplier also works the opposite way – when you lose money, you lose a multiplied amount.
Let’s assume you purchase 3X Long Ethereum Token, known as ETHBULL, which triples your Ethereum profits and losses. If Ethereum’s value increases by 2%, ETHBULL’s value increases by 6%, but if Ethereum decreases by 3%, ETHBULL will drop by 9%.
FTX currently offers four leveraged token types for every supported cryptocurrency: BULL (3X), BEAR (-3X), HALF (1/2X), and HEDGE (-1X). In the case of BEAR, HALF, and HEDGE tokens, your profits will be inversely proportional to cryptocurrency growth. So, if cryptocurrency increases by 1%, BEAR will decrease by 3%, and the opposite. This is known as a short-leveraged token, while BULL is a long-leveraged token.
But how do leveraged tokens work, you may wonder? Suppose you want to get $10,000 in ETHBULL. To do so, you invest $10,000 in your ETHBULL account, and FTX automatically purchases $30,000 worth of ETH perpetual futures, tripling your ETHBULL amount. FTX will automatically keep reinvesting your perpetual futures to maintain the necessary leverage. And if your cryptocurrency goes down, the service will sell some of the perpetual futures. That’s called rebalancing.
Leveraged tokens on FTX rebalance daily at 2:00 AM UTC or when there’s a drastic change in the position price. For instance, if the price of BULL tokens goes up by 4X, the rebalancing mechanism is triggered automatically.
Benefits of Leveraged Tokens
Leveraged tokens are mainly used for risk management. While BULL tokens multiply your profits by constantly reinvesting perpetual futures, BEAR, HALF, and HEDGE tokens reduce the risk of losing money. For instance, if you purchase only ETHBULL and ETH falls by 33%, you will lose money and have nothing left. But if you also own ETHBEAR, some of your ETH will be automatically sold while the market goes down to maintain your profits.
Alternatively, you may use leveraged tokens for short-term investment margin management. There’s no need for collateral or margin calculation as with regular margin trading. You may invest in BULL tokens and receive triple the profit when the cryptocurrency goes up. And sometimes, when the cryptocurrency goes down, you can invest in BEAR and may still be in the green. Most importantly, since leveraged tokens are ERC20 tokens, you can instantly withdraw them from your account.
Due to automatic rebalancing, the risk of losing money is relatively low if you use leveraged tokens smartly. If you own both long and short leveraged tokens, your account is unlikely to drop below $0 unless the cryptocurrency is experiencing a significant price drop.
Drawbacks of Leveraged Tokens
The biggest drawback of leveraged tokens is their susceptibility to volatility decay. In simple terms, the multiplying coefficient is beneficial only while you receive profit. But if you lose money, you’ll lose a multiplied amount. Even a minor loss in cryptocurrency can become a large loss of leveraged tokens. Sometimes, even rebalancing doesn’t help prevent losses, making leveraged tokens a high-risk investment.
Let’s assume you’ve invested $100 in ETH, and the next day, its price increases by 20%. Now, you own $120 in ETH. However, the price then drops by 40%, leaving you with $72 in ETH. If you invested in ETHBULL, the 20% increase would result in a 60% increase, and you would have $160 in your account. But the 40% decrease would result in a 120% decrease, costing you $192 and leaving you $32 short.
For this reason, leveraged tokens shouldn’t be considered a long-term investment. The faster the trading, the lower the price fluctuations and risk of volatility decay. Any cryptocurrency is volatile by its nature, so holding on to leveraged tokens may lead to major losses. You should be sure of the current cryptocurrency market direction when you buy leveraged tokens. Thus, leveraged tokens aren’t usually a good option for beginner traders.
Furthermore, leveraged token trading services like FTX and Binance charge daily management fees for rebalancing your profits and losses. FTX charges a 0.03% management fee, which may not seem much at first. But since that’s a daily fee, you can expect to pay FTX over 10% of your total profits over the course of a year. Because HALF tokens are lower leverage, their management fee is lower – 0.01% daily.
How to Buy and Sell Leveraged Tokens
You can buy and sell FTX leveraged tokens using multiple methods. Let’s take a close look at each one.
The easiest leveraged token trading method is spot markets. FTX features a spot market for each type of leveraged tokens – all market pages can be found on the service’s official website. For instance, the ETHBUL/USD spot market is dedicated to buying and selling Ethereum BULL tokens in US dollars.
On the FTX spot market page, you can filter the tokens by leverage, price, daily change in price, and name. For instance, if you select “3X” at the top of the page, you’ll only see the BULL token offers, and if you select “-3X,” you’ll see BEAR tokens.
Note that FTX isn’t the only service trading leveraged tokens, and each service has different token names. For instance, FTX 1X short token is called HEDGE, while Gopax 1X short token is called BTCHG. If the leveraged token multiplier is the same, you can trade the tokens on different platforms regardless of their name. This method is best suitable if you already own some leveraged tokens.
Another way of trading leveraged tokens is by using the “Convert” function on your FTX wallet page. Select a token, click “Convert” to the right of its name, and you’ll see all available conversion options. This method is great if you already own some cryptocurrency but don’t yet have any leveraged tokens.
The riskiest method, which isn’t recommended for beginners, is the creation or redemption of leveraged tokens. You should thoroughly read all leveraged token documentation and have some experience since creation and redemption have a market impact. You can’t know the leverage token price until you’ve created or redeemed them.
Evaluate the Risks
With all the benefits and risks laid out, you can now weigh up whether investing in leveraged tokens is worth it. The main objectives are to choose the right token type, trading method, and understand the current state of the crypto market. If you’ve never bought leveraged tokens before, we’d suggest gaining some experience with small investments before participating in a big trade.
What are your thoughts on the current cryptocurrency market state? Which currency do you believe has a future and which doesn’t? Share your thoughts in the comments section below.