Binance, the world’s largest cryptocurrency exchange by volume, offers a variety of products for traders. Spot trading, margin trading, and futures trading are trading instruments available for traders exploring the exchange platform. In May 2020, Binance launched Binance Leveraged Tokens for trading and listed BTCUP and BTCDOWN as the first currency pair options available. Since then, the exchange has recorded at least 40 Leveraged Tokens paired against Tether (USDT) for trading. While the concept of BLVTs may not be strange to experienced traders, newbies might have a hard time understanding how they work.
What are Binance Leveraged Tokens?
The concept of leveraged tokens first came on board on the FTX exchange platform. Not many exchanges offer the leveraged token instrument, and the Binance Leveraged Token is a slightly different type. Leveraged tokens are unidirectional futures positions, either long or short, to which leverage is applied. For instance, 1INCHUP is a leveraged token on Binance, with a multiplier of up to 4× attached to the position.
Binance Leveraged Tokens are tokenized forms of Binance Futures positions. Hence, a BTCUP token represents a long futures position on Bitcoin, while BTCDOWN represents a short futures position. Generally, leverage between 1.25x to 4x is attached to each BLVT. Presently, BLVTs are available for trading on the Binance Spot Market, and you can only hold them in your Binance account. Users cannot withdraw Binance Leveraged Tokens directly to their wallets.
Why Buy a Leveraged Token?
Leveraged tokens on Binance are futures positions without the complications and liquidation risks involved. When trading futures, traders constantly have to worry about risk management, and the threat of liquidation continually hovers in the air. BLVTs offer you a multiplier effect on profits from leveraged futures positions while eliminating the overall risks.
Buying BTCUP would mean you expect the price of Bitcoin to rise, and buying BTCDOWN means you wish it to go the opposite way. With the leverage attached, a 5% increase in the Bitcoin price would mean a 5 x leverage (5 x 4, for instance) percentage profit or loss on your capital. With a leveraged token, a movement in the favored direction of the token means an enhanced increase in the value of the DLVT. The promise of maximally increasing profits in the short term is the lure that drives traders to consider leveraged tokens and even futures trading.
Binance Leveraged Tokens window on Binance Web.
How do BLVTs Work?
Most leveraged tokens offered on other platforms like FTX have fixed leverage attached to them. However, BLVTs operate through a different leveraging mechanism that adjusts based on the market conditions per time. If the market is currently bullish, the leverage on a long BLVT will most likely be close to 4x. If the market sentiment is bearish and the price is falling, the multiplier on a long BLVT will most likely lean towards 1.25x to reduce your loss. However, Binance did not reveal the current leverage on any Binance Leveraged Token previously, but it remains between 1.25x to 4x.
How to buy Binance Leveraged Tokens
● Complete the KYC requirements to gain access to trading instruments.
● Deposit crypto, or buy through Binance P2P or the debit/credit card option. Buying stablecoins like USDT is most advised.
● Click on the ‘Markets’ section. You can find BLVTs in the Spot Markets and ETF sections.
● You will find a Leveraged Trading tutorial which you must complete to help you familiarize yourself with the process.
● When you complete the tutorial, you can go on to buy the desired amount of the token.
Note that Binance has restricted access to BLVTs in some regions.
BTCUP/USDT Chart on a daily time frame.
Important Terms to Know When Interacting With BLVTs
Like in all crypto trading options, there are a few terms associated with Binance Leveraged Tokens, which you must know. Here are a few below:
● Rebalancing: To minimize losses and maximize profits, Binance sells some fractions of BLVT positions when in loss or reinvests the profits at unspecified times. Rebalancing helps increase the potential of making profits and reduces the risks of losing by selling fractional amounts when in a losing position.
● Net Asset Value: The value of any BLVT in Tether USDT is known as the Net Asset Value. When the BLVT is redeemed to USDT, the corresponding Net Asset Value will be the value of USDT received.
● Subscription: Instead of buying a token as you would in spot trading or opening a position when trading futures, you subscribe to a BLVT. There is a 0.1% subscription fee charged on each subscription.
● Redemption: Two options are available for use when you want to close a leveraged token position on Binance. The first is to sell the BLVT for USDT on the spot market. The second option is to redeem the token directly for USDT. Binance charges a fee of 0.1% on every redemption.
● Management fee: Binance will charge a daily 0.01% fee on each Leveraged Token position you hold for as long as you hold the token.
● Volatility drag: The crypto market is highly volatile, and attaching leverage further complicates trading. While leveraged tokens can yield exponential profit, the multiplier can also trigger higher losses. A 3X multiplier will generate a 60% profit if a token’s price rises by 20%. On the capital of $100, you would have $160. The same 3x multiplier will trigger a 45% loss if a token’s price falls by 15% the next day–which is a significant loss of $72, leaving only $88 left. This volatility drag ultimately reduces capital over time, generating more loss than profit. Binance Leveraged Tokens use a variable leveraging mechanism to minimize the effect of volatility drag.
Ignorance and inexperience often lead to losses in crypto trading, which can easily ruin your confidence. This guide details all you need to know about Binance Leveraged Token as a beginner – Happy Trading.