If you have spent any time trading with leverage in the Crypto markets, you will be able to confirm a very real reality and that is that leverage is great but sometimes it really hurts! Being on the right side of the market in a leveraged position feels great and the gains begin to appear almost magically. Seeing that dollar or satoshi amount climbing sends many into a state of euphoria.
However, on the flip side, it can be absolutely devastating. If you are reading this and have only ever bought actual tokens or coins that you have stored in a wallet, you will not be able to appreciate the magnitude of the situation. If you think drops in Crypto are harsh, you need to imagine multiplying those numbers by a factor of five, or even a hundred.
Exchanges Have Adjusted
Due to regulatory concern, most exchanges such as Binance and FTX recently dropped their maximum leverage to 20X the principal amount. Previously, these exchanges offered up to 100X, which in the Crypto space is crazy! Unlike holding a coin, which if the value drops, you still have your asset, a leveraged position is different. When the value drops far enough in a leveraged position, it is liquidated, leaving the trader with absolutely nothing.
As an example, if you are trading with 5X leverage and the price moves 20% against your position, you are out. Whatever you invested is now gone, with absolutely no possibility of returning. It’s gone for good! However, you will usually receive a margin call warning you to increase your allocation, so as to avoid liquidation. Depending on how aggressive the market move is, you may not have enough time to fund your position.
A Dangerous Game
This all sounds very dangerous and rather risky. For those of us who do use leverage, we use it sparingly. I, fortunately, had a lot of experience trading with leverage in the forex market. It took many years but eventually, I figured out a pretty sound approach.
Unless you have a very strategic approach to leverage you will most likely lose. Things can go horribly wrong very quickly! This is obviously due to your losses being magnified by the gearing of your leverage.
What If You Could Avoid Liquidation
Imagine you could open a leveraged position without the risk of liquidation. This sounds like a dream to the maybe not so skilled futures trader. Instead of being liquidated, the position would just keep losing value. In this case, it would be an actual token. I am talking about leveraged tokens on FTX!
These leveraged tokens are rebalanced every 24 hours and so the possibility of actual liquidation is practically almost zero. Let’s take a closer look at one of these tokens.
The LINKBULL 3X Token
Below is the monthly chart for the LINKBULL token, which is leveraged at 3X the daily move. For example, if LINK went up 10% on a day, the LINKBULL token would appreciate by 30%! The same is true for a move towards the downside, the token would then decrease in value.
You will note the massive appreciation and depreciation reflected in the graph. What you are witnessing here is the effect of compounding. When the market shifts into a bullish phase, gains are compounded week after week and sometimes month after month. This is when the token reaches phenomenal highs. The extreme lows are obviously when the trend is in an ongoing bearish direction.
Benefits Of This Token
Due to the massive potential in a market that has secured a direction, the capital allocation does not need to be significant to ensure gains. Although sideways price action is not good for such an instrument, a market that is set in a particular direction for some time can multiply profits at an alarming rate.
A typical 3X leverage trade would get liquidated when the market moves 33% against it. In the case of the FTX 3X tokens, they simply just keep losing value. As seen in the previous graph of the LINKBULL token, prices can recover from devastating lows, as can they drop from euphoric highs.
Both BULL & BEAR
These tokens are available as both BULL and BEAR tokens, meaning you can profit from both a bull and a bear market. As mentioned earlier, these instruments perform exceptionally well, once the market has entered a long-term term trend, ultimately securing ongoing compounding of profits.
These are fun instruments to utilize with small or discretionary amounts. However, they are extremely volatile and should only be experimented with by those who have some previous experience with leverage. Although liquidation is unlikely, losses can be massive and subsequently rather difficult to recover from.
The clear benefits here are that liquidation can be avoided, while still making use of leverage. Furthermore, once a trend is in motion, purchasing the appropriate leveraged token can see gains rack up to astronomical highs. The fact that these are actual tokens is another benefit. In other words, these are not paper contracts or CFDs but rather actual assets that you can take custody of.
The downside is that losses can also stack up exceptionally fast if you are positioned against the flow of the market.