How Binance leverage tokens works? [Complete Guide For Beginners]

How Binance leverage tokens works? [Complete Guide For Beginners]

By Trading Empire™ | DYOR-:) | 3 Aug 2021


What are Binance Leveraged Tokens

 BLVTs are tradable assets that give you leveraged exposure to the underlying asset, unlike leveraged trading. You can get into a leveraged position without the need of having any collateral maintaining, margin maintenance, or worrying about the liquidation risk.

Leveraged Tokens are listed on the Binance spot market like other coins and tokens you can find all tradable binance leveraged tokens under the leveraged tokens tab also you can find the tokens under exchange-traded fund ETF on the spot trading page. 

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Binance's first available leverage tokens are BTCUP and BTCDOWN. BTC up allows users to generate leveraged gains.

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When the price of bitcoin goes up. Conversely, BTC down allows users to generate leveraged gains.

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When the price of bitcoin goes down. The ticker name BTC refers to the token representing BTC/USDT perpetual contract positions. 

The blvt acts as a perpetual leverage target and tracks the change in the notional value of the perpetual contract positions.

In leverage before getting started with finance leveraged tokens make sure you have already accepted and agreed to the binance leveraged token risk disclosure terms and conditions.  

How do the Binance leveraged tokens work?

Unlike, other leveraged tokens, blvts do not maintain a constant leverage target. Instead, they maintain a variable leverage target between 1.25x times to 3x times.

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 Let's take a look at the key advantages of a variable leverage target mechanism.   Currently, the conventional, lt product promises a constant three times leverage.   

which means traders can potentially gain triple the returns from the underlying asset.

   For instance, if BTC appreciates by five percent,lt should generate a 15% return to traders. 

In order to keep constant leverage, each leverage token reinvests profits daily as long as the underlying asset price rises. 

If the underlying asset price goes down the position decreases to reduce its leverage back to constant. This is known as rebalancing.

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Rebalancing  is the process of leveraged tokens reducing or increasing their exposure to their underlying assets.

In order to maintain the daily objective, however, users are not aware of how the constant leverage impacts long-term returns. 

Especially, in markets where prices are consolidated for an extended period.  Let's use, Tanvir as an example to see how constant leverage impacts the net asset value net.   

Asset value net also called   NAV is used to refer to the price of a leveraged token.

Tanvir spends 100 USDTs to buy equivalent  tokens at 3x times constant leverage long position. Let's assume, that both the underlying asset at a 3x times. Lt starts at an equal value of one hundred dollars each.

 On day one, the underlying asset goes up  by five percent. Therefore, the three times lt goes up by 15% and the nav would go up to 15%.  

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On day two, the underlying asset goes down by five percent. Likewise, the lt goes down by fifteen percent and the nav would go down to 97.75%. 

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As you can see the price of the underlying asset did not change much, while the three times leveraged token lost more than two percent of its initial value.  

 

The situation shown here is known as volatility decay.

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Volatility decay is the long-term detrimental impact that volatility has on the investment the greater the volatility and the longer the time horizon.

The more detrimental the impact of volatility decay tends to be. Let's assume, that the earlier example  plays out over an extended period. Where the price of the underlying asset  remains flat and volatile between the range of  +5% to -5%. 

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Let's take a look at the impact on the value of both securities the figure above shows how volatility decay could impact total returns. In a sideways market.

This would be devastating for Tanvir. who bought and held onto the 3x times. lt  thinking that it is a perfect reflection of the underlying asset by using a variable target leverage of 1.25x times to 3x times.  

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BLVTs are designed to lessen the volatility decay of traditional leveraged tokens caused by constant leverage rebalancing.  

Small market fluctuations do not result in blvts having to rebalance as long as the token value maintains. Its correlation with the value of its underlying asset within the variable target range of between 1.25x times the 3x times. When the real leverage ratio is outside of the target leverage range. The algorithm decides on a new target leverage ratio, which automatically triggers the rebalance mechanism.  

Although, binance leveraged tokens have a better performance over traditional leverage tokens. 

They are not a perfect substitute to holding crypto assets for the long term. Binance leverage tokens are tradable in the binance spot market and they track binance perpetual contracts. A user can buy or sell the  tokens in the spot market and the trading fees are identical to binance spot trading fees.

Plus, blvts charge a low daily management fee of 0.01% with an annualized rate of only 3.5%.  

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In addition, there are two ways to open  or exit your position. Users can buy or sell the tokens on the spot market or  subscribe or redeem them at the market value of its NVR    Subscription and redemption fees are 0.1% per trade.

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Binance leveraged tokens offer many viable alternatives for increasing market gains, putting less trade capital at risk, and even profiting with strong market momentum extend your trading toolkit.

Here is all Binance leverage tokens list:

https://www.binance.com/en/leveraged-tokens/tokens/allTokens


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Disclaimer!

This is not a kind of financial advice. You  can better care of your money. Because trading is like a war. Where you make yourself decision.

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Trading Empire™
Trading Empire™

I'm interested in crypto for the last two years. Pretty much love you crypto 🤗


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