Introduction
Leveraged tokens give you leveraged exposure to the price of a cryptocurrency, without the risk of liquidation. This way, you can enjoy the increased profits that a leveraged product can offer you, without having to worry about managing a leveraged position. This means you don't have to monitor collateral, maintain margin requirements, and of course, there is virtually no liquidation risk.
The original design of leveraged tokens would be introduced by the derivatives exchange FTX. These tokens have been subject to intense debates, especially because their performance is not as expected in the long term. Binance Leveraged Tokens (BLVT) propose an alternative design.
If you want to read about how FTX leveraged tokens work, take a look at the Beginner's Guide to FTX Leveraged Tokens.
What are Binance Leveraged Tokens (BLVT)?
Binance leveraged tokens (BLVTs) are tradable assets on the Binance spot market. Each BLVT represents a basket of open positions in the perpetual futures market. Therefore, a BLVT is basically a tokenized version of leveraged futures positions.
The first BLVTs available are BTCUP and BTCDOWN. BTCUP aims to generate profits with leverage when the price of Bitcoin rises, while BTCDOWN aims to generate profits with leverage when the price of Bitcoin falls. These leveraged profits are between x1.25 and x4. We will analyze why and how they approach such leverage, in the next section.
Currently, Binance Leveraged Tokens are only listed and can be traded directly on Binance, so you will not be able to withdraw them and deposit them into your own wallet. Please note that Binance Leveraged Tokens are not issued on-chain.
How do Binance Leveraged Tokens work?
One of the main differences between BLVTs and other types of leveraged tokens is that BLVTs do not try to maintain a constant leverage. Instead, they aim for a target range of variable leverage. In the case of BTCUP and BTCDOWN, this range is between x1.25 and x4 - which acts as a perpetual leverage target for the tokens. The idea is to maximize potential profits when the price rises, and minimize liquidation risk when the price falls.
This objective leverage is not constant, nor is it publicly visible. Because? The main reason is to avoid front-running situations. If these tokens were reset at predefined intervals, there could be a way for other traders to take advantage of an already predicted event. Since target leverage is not constant, tokens will not be forced to rebalance unless market conditions require it. Therefore, hiding target leverage will mitigate such strategies as traders will not be able to anticipate rebalancing cases.
Leveraged tokens are traded on the Binance spot market. Furthermore, they can be redeemed for the value they represent. But to do this, you will have to pay a redemption commission. In most cases, however, it will be more profitable for you to abandon your position in the spot market than through the redemption process. Exiting through redemption will usually be more expensive than through the spot market, unless a black swan type situation occurs. It is for this reason that it is almost always recommended that you abandon your BLVT positions through the spot market.
On the leveraged tokens page, you will find a term called Net Asset Value (NAV). It designates the value of your leveraged tokens, denominated in USDT. When you redeem your tokens, the USDT you will get will be determined by the NAV.
Why use Binance Leveraged Tokens?
One of the main sources of confusion regarding leveraged tokens is the concept of volatility drag. In simple terms, the concept of volatility drag refers to the detrimental effect that volatility has on your investment over time. The higher the volatility, and the longer the time horizon, the more significant the effect of volatility drag on the performance of leveraged tokens.
Leveraged tokens generally perform as you would expect when there is a strong trend and market momentum is high. However, the same is not true in a side market. Binance created variable leverage as a solution to this problem. BLVTs only rebalance in times of extremely high volatility and are not forced to rebalance periodically otherwise. While this does not mitigate the problem completely, it greatly reduces the long-term effects of volatility resistance on BLVT performance.
What are the fees for using Binance Leveraged Tokens?
When you trade BLVT, you will need to take into account the commissions you will pay.
First, you will have to pay trading commissions. Since BLVTs are traded on spot markets like any other currency such as BTC, ETH or BNB, the same trading fees apply. You can check your current commission here.
You will also have to pay management fees. Please note that these tokens represent open positions in the futures market. You are essentially purchasing a tokenized version of these positions when you purchase a leveraged token. Therefore, to keep these positions open, you will have to pay a management fee of 0.01% per day. This translates into an annualized rate of 3.5%.
Additionally, there are two ways to exit your position if you have a BLVT. One way is to sell the token on the spot market. Easy enough. However, you also have the option to redeem them for the value they represent. When you redeem your BLVTs through this process, you will get the value of your tokens paid in USDT. In this case, you will have to pay a 0.1% exchange fee on the value of your tokens.
However, it is worth noting that under normal market conditions, you would be better off exiting your spot market position. This redemption mechanism is there to provide an additional way to exit your positions during extraordinary market conditions.
Something else to consider is financing. As you already know, BLVTs represent open futures positions. This means that funding fees apply to those positions. However, you won't have to worry about them as they are not paid between leveraged token holders, but rather between traders in the futures market. However, it is still worth keeping in mind as the funding fees paid to the futures account are reflected in the value of the BLVT.
Are you looking to get started with cryptocurrencies? Buy Bitcoin on Binance!
How to Buy and Redeem Binance Leveraged Tokens
BLVTs are listed on the Binance spot market like other coins and tokens. However, you will find them in a different place: under the ETF tab in the advanced trading interface. This is to avoid confusion and help you differentiate these tokens from other types of tradable assets.
You can also find the Leveraged Tokens page on the top bar of the Binance homepage. The following steps describe how to buy Binance Leveraged Tokens (BLVT).
Log in to Binance.
Hover over Derivatives in the top bar and select Leveraged Tokens.
Select the BLVT trading pair you would like to trade.
This will take you to the BLVT home page.
Click Buy and that will take you to the advanced trading interface.
Before you begin, read the risk disclaimer. If you are over 18 years old and agree to the statement, check the box and click Confirm to continue.
At this point, you should be able to trade BLVT similarly to how you trade other coins and tokens.
For example, here is the BTCUP page. If you already have BLVT and would like to redeem them, you can do so on this page (click the Redeem button). You can also check your redemption history from here.
Conclusion
BLVTs give you leveraged exposure to the price of a cryptocurrency without the hassle of managing a leveraged position.
Thanks to variable target leverage, BLVTs should have a more consistent performance over the long term. While holding BLVT is not equivalent to holding a leveraged position, BLVTs can be used to expand your trading toolkit and optimize your trading strategy.