Margin trading is a risky business where profit margins are paper-thin. That’s a fact. While hundreds of thousands of people have dabbled into the market, be it via forex or cryptocurrencies, the truth still remains: Making a living out of regular margin trading can be extremely difficult, if not impossible. Moreover, a single mistake can completely destroy your position, sending you back weeks or months.
Due to the extremely thin profit margins, leverage trading is also a common practice: In this model, a user receives an amount of money for trading that’s several times higher (Usually 5x or 10x, though in some cases much larger) than the amount of money they have. They are then allowed to trade with that money, with the caveat that if they lose an amount of money equal to their initial amount (their leverage) they must immediately liquidate their position and pay back the loan.
Leveraged tokens are an attempt to help with this complicated process. Instead of having to ask for leverage and then invest using it, you just buy leveraged tokens. Leveraged tokens have their value semi-pegged to that of another crypto token… except their value changes at 2-3x the rate.
In other words, if you want to try leverage trading, using leveraged tokens make the process much easier by getting rid of the middleman and allowing you to multiply your gains (or losses) automatically.
How do Leveraged Tokens on Binance work?
First of all, not every token that’s traded on Binance works as a leveraged token. Not all tokens have a leveraged equivalent, either. As with other Binance programs, like pegged tokens, leveraged tokens are only offered for a handful of cryptocurrencies – naturally, the ones that see leverage trading more often, and thus where there’s a market.
An important thing to note is that a leveraged token isn’t equivalent to the actual token. A Binance Leveraged Bitcoin, for example, can’t be used to make Bitcoin purchases. They’re essentially a separate token, whose value is pegged to that of Bitcoin.
Knowing that, the process is simple: You can buy or trade leveraged tokens on Binance in almost the same way you can buy or trade the actual tokens, with the only difference being that the leveraged token’s daily change will be steeper. For example, if the price of a Bitcoin goes up by $1,000 during a trading session, the price of a Bitcoin-based BLVT will go up by $2,000-$3,000.
Sounds like easy money… Where’s the catch?
There isn’t much of a catch in the sense that there’s no small print that will make you lose your money. However, one thing you’ll have to know is that leveraged trading tokens are rebalance every day to make sure the relative value to the base token holds.
What does this mean? Well, it’s simple. Say, a BTC leveraged token (we’ll call it BTCL) releases today, with the initial exchange being 1BCT = 1BTCL. At the end of the first day, BTC gains 10% of its value. Since BTCL was set to 3x leverage, that means that at the end of that day 1.3BTC = 1BTCL.
That works for a single day. However, as more days go on, problems start arising: First, because maintaining the same ratio over many trading sessions can get difficult – what started as a 3x leverage can easily balloon into much higher values after successive positive sessions, for example. But more importantly, because the exchange needs to have liquidity so they can perform token payouts.
This directly affects the value of the token, as one would expect. In many cases, this will make earnings somewhat smaller over a longer period than the actual accumulative. It can also make losses smaller over a longer period in the same way. Due to how the market and rebalancing works, it can also create losses even when the original token’s price variation evens out to 0% (that is, if price goes up, then down, over two separate sessions.)
Rebalancing is important to maintain liquidity and keep the reference existing, but you need to look into how your exchange does it to know exactly what to expect. For more information, see the “Volatility decay” section in Binance’s own website.
Alright. What else is there? Why should I trade on Binance and not elsewhere?
Your choice of trading company is entirely yours, and people tend to have vastly different preferences depending on their goals. However, Binance does offer a few things to their leverage traders that might sway your opinion:
Tiny trading fees. Binance leveraged tokens exist in Binance’s own blockchain – and, as usual for Binance operations, its own intra-blockchain trades have much smaller fees than extra-blockchain ones. Obtaining Binance Leveraged Tokens will result in a much lower fee than obtaining the tokens themselves, on top of the extra earnings.
Constant leverage rebalance. While other exchanges only rebalance the token value, Binance also changes the leverage for each trading session depending on how the token has been faring. Generally, this means the leverage will flow between 20 and 30% depending on the current market, but it can also go higher or lower at times.
High Market Liquidity. Binance is one of the crypto exchanges with the highest liquidity in the world – and thus they have enough crypto in storage to weather almost any market swings. This is important when the market is particularly volatile, since smaller exchanges with lower liquidity could run into issues if prices vary widely in an unexpected manner. For Binance, this shouldn’t be a problem.
The market depth of cryptocurrencies is improving and there are more ways to trade and explore digital currencies.
With Binance LVT, you can take more positions and reap rewards. As exciting as the crypto market might be, never forget that it is high risk, and only invest what you can lose and still be able to get a good night rest.