Pros and Cons of Leveraged Tokens

Gate.io Leveraged Tokens are a type of derivative that provide leveraged exposure to the underlying asset. Like the spot trading tokens, leveraged tokens can be traded on the spot market. Each leveraged token represents a basket of perpetual contract positions. The price of a leveraged token moves along with price changes in the perpetual contract market, and the leverage level moves up and down accordingly. When you are investing in them, you must know the benefits and possible risks of this product. This article will help you to figure out all features of leveraged tokens.

Pros of leveraged tokens

Easy to start with

Leverage tokens enable anyone to take an intra-day leveraged position in a digital asset. A user can take a fixed 3x leveraged exposure to a certain underlying asset by simply buying and holding the tokens. The leveraged exposure is automatically granted. It will actively manage a leveraged position. If the investor wants to close it, all they need to do is to sell the tokens.

Higher profit when the market is stable

The obvious benefit of leveraged tokens is that if you manage to bet which way the market will go, you’ll have higher gains than you would when you trade a non-leveraged coin.

No margin maintenance and collateral needed

You do not have to maintain a margin or a given amount of collateral to open a position . You can just buy the leveraged token and you automatically have that position. You don’t need to add more collateral if the price goes down or close if the price goes up thanks to the rebalance function. This means the risk of liquidation is much lower with leveraged tokens.

Free from liquidation

Leveraged tokens are essentially token pairs on the spot market and are therefore free from liquidation. Even if the price of a leveraged token falls from 100USD to 1 USD, the quantity that the trader holds will not change. If considerable losses have been incurred, it may trigger the automatic position reduction mechanism. Only in extremely rare cases, the price of leveraged tokens may approach 0.

Automatic profit compound and automatic position reduction

When there is a one-sided rise on the market, 3X leveraged tokens can generate more profits than conventional margin trading with 3X leverage. The reason for this is that the profits made are automatically used to purchase more leveraged tokens to generate more profits. When the market falls, liquidation will not happen and automatic position reduction will be triggered instead of a stop loss.


Cons of leveraged tokens

High risk

Although leveraged tokens have comparatively lower risks of liquidation than other derivative products, they still have high risk due to leverage, which will magnify both your profits and losses. The value of your tokens can drop substantially if the market moves significantly.

Not a good fit for long-term investment

Leveraged tokens are only fit for professional investors to use for risk hedging or short-term one-sided market investment. Since they are rebalanced daily, leveraged tokens are not meant for long-term holding. Because of the existence of the position adjustment mechanism, the risk of holding leveraged tokens for a long time is extremely high. The longer the holding time, the greater the volatility and friction costs.

Fund Management fee

The funding fees of perpetual contracts are paid between traders on opposite sides of the contract, but when trading leveraged tokens a fixed daily rate of management fee will be charged: a daily management fee of 0.1% is charged.

Volatility decay

Leveraged tokens are products to amplify the every movement of an underlying cryptocurrency. Therefore, this also means that volatility is amplified by a constant leverage factor. Even with a small back-and-forth price movement, volatility decay will erode your investment.

All content above is not investment advice. Leveraged tokens are high-risk products. Leveraged tokens can be very rewarding for short-term trading but you need to be cautious when holding these tokens over a long period of time. Please make sure you have a good understanding of the risks involved, before trading leveraged tokens.

Where to trade?
Leveraged token trading:

APP：homepage - markets - ETF - choose the token


Website： https://www.gate.io/etf#more