Leveraged tokens are ERC20 tokens that have leveraged exposure to crypto. Different from margin trading with traditional tokens, leveraged tokens require no collateral when traded on margin.
For example, users can directly buy BTCBULL (+3x), a 3x long BTC token, for 3x margin trading of BTC.
Why Leveraged Tokens?
There are three reasons to use leveraged tokens.
- To Manage Risk
Leveraged tokens will automatically reinvest profits into the underlying asset. If your leveraged token position makes money, the tokens will automatically put on 3x leveraged positions with that.
Conversely, leveraged tokens will automatically reduce risk if they lose money. If you put on a 3x long BTC position and over the course of a month BTC falls 33%, your position will be subject to forced liquidation and you will have nothing left. But if you instead buy BTCBULL, the leveraged token will automatically sell off some of its BTC as markets go down--likely avoiding forced liquidation so that it still has assets left even after a 33% down move.
- To Manage Margin
You can buy leveraged tokens just like normal ERC20 tokens on a spot market. There is no need to manage collateral, margin, liquidation prices, or anything like that; you just spend $10,000 on BTCBULL and have a 3x leveraged long coin.
- ERC20 Tokens
Leveraged tokens are ERC20 tokens. That means that--unlike margin positions--you can withdraw them from your account. You go to your wallet and send leveraged tokens to any ETH wallet. This means you can custody your own leveraged tokens; it also means you can send them to other platforms that list the leveraged tokens.
There are currently two leveraged tokens for every future on BitMax.io: BULL (+3x), BEAR (-3x).
If the movement of the underlying asset on days 1, 2, and 3 is M1, M2, and M3, then the formula for the price increase of the 3x leveraged token is:
New Price = Old Price * (1 + 3*M1) * (1 + 3*M2) * (1 + 3*M3)
Price movement in % = New Price / Old Price - 1 = (1 + 3*M1) * (1 + 3*M2) * (1 + 3*M3) - 1
Take BTCBULL(+3x), a 3x long BTC token:
- For every 1% BTC goes up in a day, BTCBULL goes up 3%.
- For every 1% BTC goes down, BTCBULL goes down 3%.
As an example, say that a user creates or buys 10 BTCBULL tokens when the BTCBULL NAV is $5,000, spending $50,000. Then, say that the BTC token goes up 5% that same day, from $4 to $4.20. BTCBULL's NAV will increase 3 * 5% = 15% from $5,000 to $5,750. If the user sells the BTCBULL at the new NAV--$5,750—the user will make $7,500 on their $50,000 investment.