Going with the correct underlying assets and financial products at the right time is always challenging for investors, particularly with so many options available on the market and the altering market environment. After all, while the very idea of multiplying your returns sounds enticing, bearing your losses definitely sounds worrisome. For that reason, you must know what you’re investing in before you even pour one cent of your hard-earned money into any financial product in order to collect hefty returns.
In that context, one of the latest investment opportunities comes in the form of leveraged tokens, which are one of the numerous hybrid investment products the cryptocurrency market has spawned in the last couple of years. It really comes as no surprise that these leveraged tokens are pretty unpopular with financial authorities and institutions that worry about the high level of investor risk.
If you want to know more about how intelligent crypto investors such as yourself can hugely benefit from these leveraged tokens, you are in the right place. This brief article will introduce you to these tokens and explain how leveraged tokens work so you can better understand this product that, if used wisely, can better support your ride through the volatile crypto market.
Leveraged Tokens: Explained
In investing, buying on margin, or leverage is a profound way to magnify your eventual returns by practically borrowing money. Put differently, these leveraged tokens permit crypto traders access leverage, all without having to deal with more complicated crypto trading features like liquidation or collateral.
For example, liquidation is the point where the losses sustained by a margin trader become more significant than their initial investment, so the crypto trading platform sells the position. Here come the leveraged tokens, which will reduce the risk of liquidation through a method of rebalancing. With leveraged tokens, not only that crypto investors can multiply their returns, but they can also bet on the price going up or down.
However, remember that leveraged tokens are still very complex products, even though they are also ordinary tokens on the blockchain that can be sold or bought with the click of a mouse button.
What You Need To Know About Leveraged Tokens To Get The Most Out Of Them
So, while leveraged tokens appear easy to understand and use, they are still quite complex products that need to be fully understood before investing in them. Here’s what you should know in order to make the most out of your leveraged tokens.
Rebalancing Can Have A Significant Impact On Their Price
First, you should know that rebalancing is how these leveraged assets are programmed to automatically decrease or increase their positions to preserve the target leverage and dodge liquidation. So, for instance, if the price of ETH has changed, the ETHBULL leveraged token might need to sell or buy ETH to keep its position.
Most tokens rebalance daily, which means that at the same time, they sell or buy to decrease or increase their leverage. Leveraged tokens will also rebalance automatically if there’s a massive change in a given asset’s price. In order to make profits with leveraged tokens, one must understand when and how your token might rebalance, as it works quite differently on different crypto exchanges.
These Tokens Are Short-Term Investment Products
Let’s explain it like this—if you decide to buy ETH and ETH’s price increases over time, you will make a profit regardless of what happens on the market on a day-to-day basis. However, if you purchase and hold a USDT-ETHBULL token, you’ll essentially magnify the impact of any price movements, which might prove costly.
Prepare To Pay Fees And Calculate Them In Your Position
One more reason why you should treat the leveraged tokens as a short-term investment is that you will have to pay daily management fees. While these fees are not really that big, they can certainly add up and change your whole trading calculation. Therefore, when selecting a platform to trade on, make sure you go through their management fees and go with an exchange with low leveraged tokens fees.
So, Should You Purchase Leveraged Tokens?
The short answer to this question is yes, you should definitely buy leveraged tokens if you first take the time to fully understand how they actually work and the potential risks that might occur. After all, leveraged tokens are considered to be advanced trading products that are designed for more experienced investors and not novice traders. There’s definitely a reason why crypto experts label them as the most misunderstood products in the crypto market. In addition, you should have a clear understanding of how rebalancing works on the crypto exchange you plan to use.
In the end, we know that trying to play the market via short-term trading is always both more intriguing and challenging than making long-term commitments. Still, keep in mind that this fantastic investment opportunity that can help you make money is very risky and incredibly volatile.
On the other hand, leveraged tokens can provide investors with great returns in times of momentum because when a market is trending in a given direction, the leveraged tokens can outperform their spot and derivatives contracts. Whatever you decide, try to play it safe and never invest money you can’t afford to lose.