What is the difference between leveraged tokens and margin trading?

2022-03-09, 03:41

Leveraged token products are hedged and managed on perpetual contracts. By the method of capital management optimization, to some extent users’ actual leverage expenses and risks will be reduced. In investing, the strategy of leverage, or buying on margin is to increase your returns (or losses) by essentially borrowing money. Margin trading is usually more complicated and requires active management on the investor's part. Leveraged tokens, on the other hand, are a simple alternative that does not require you to do anything except trading. In this article, we will talk about the differences between leveraged tokens and margin while trading in practice.

First of all, leveraged tokens seek to magnify profits by amplifying the rise and fall of the underlying asset, and the leverage is reflected in the price changes. However, margin trading leverages the borrowing of funds to its margin amount to enlarge the profits or losses, it provides traders with greater sums of capital, allowing them to leverage their positions. The leverage is based on the amount of crypto that the investor holds.

Secondly, leveraged tokens products do not require margin or crypto borrowing, and there is no risk of liquidation. A daily management fee of 0.1% will be charged for leveraged tokens including all costs incurred by trading leveraged tokens, including handling fees of contract trades, funding fees, and frictional expenses due to price differences when opening positions, etc. For margin trading, if the market moves in an unfavorable direction, a trader’s assets may not be able to fully cover the fund they borrowed. To prevent this from happening, the protocol will liquidate your position before getting to a certain liquidation ratio.

Lastly, the biggest difference between leverages tokens and margin trading is that leveraged tokens will rebalance themselves periodically or when reaching a certain threshold, in order to maintain certain leverage.

Leverages can bring higher profits, but also higher risks. Different financial products may have very different ways of providing leveraged exposure for traders. Before trading on leverage, users should pay attention to the models deployed and do their own extensive research.