Leveraged Tokens Explained: A Complete Walkthrough
Choosing the right financial products and underlying assets can be challenging for investors, especially with so many options available and the changing market environment. This guide will introduce you to Leveraged Tokens — a type of product that, if fully understood and used wisely, can better support your ride through this volatile market.
What Are Leveraged Tokens?
In simple terms, a Leveraged Token is a financial product designed to track the price movements of an underlying asset by using derivative instruments to magnify the returns of the underlying asset (with 3x leverage, for example).
What Are the Differences Between Spot, Leveraged Tokens and Derivatives?
Before delving into the use of Leveraged Tokens, it’s important to understand the differences between Spot, Derivatives and Leveraged Tokens. Choosing the right product based on the market environment — and your risk appetite — will help you maximize yield while maintaining an acceptable level of risk.
Spot allows an investor to buy and sell a cryptocurrency directly using fiat currency. This simply means trading cryptocurrencies such as BTC and ETH using USD.
With derivatives trading products, traders are able to gain profit by trading contracts based on their personal prediction of the price movement.
A Leveraged Token is essentially a fund that tracks and magnifies the cryptocurrencies' P&L and price movement. For example, buying BTC3L (i.e., long BTC with 3x leverage) will allow you to gain a 30% return if the price of the underlying BTCUSDT rises by 10%.
So, what are the pros and cons of Leveraged Tokens compared with the other two products?
No Fixed Range
Buy and Sell
Buy and Sell
Purchase and Redemption
Long and Short
One-sided Rising Markets (Long)
One-sided Markets (Long and Short)
In summary, Leveraged Tokens offer the following unique advantages:
• Compound yield. A dynamic rebalancing mechanism, designed for Leveraged Tokens, which compounds profit in one-sided markets (whether long or short).
• Controlled risk. No margin is required, and in theory, there is no risk of liquidation for Leveraged Tokens.
• Easy navigation, with leverage that ensures additional yield. You can simply buy a Leveraged Token by choosing to long or short an underlying token. Compared to Spot, leverage means that any yield is magnified. And, unlike derivatives trading products, Leveraged Tokens don't require a margin. This allows you to make the most of your funds.
How Can an Investor Use Leveraged Tokens to Magnify Yields?
Here’s an example. Suppose the spot price of BTCUSDT rises from $10,000 to $10,500 in one day — a 5% increase.
• If you’ve bought the BTC3L (long with 3x leverage) Leveraged Token, then you’ll have a 15% return.
• If you’ve bought the BTC3S (short with 3x leverage) Leveraged Token, then you’ll incur a loss.
With the correct prediction of the underlying token's price movements under suitable market conditions, you can significantly magnify yield as compared to holding a Spot position.
What Types of Leveraged Tokens Does Bybit Offer?
Currently, Bybit supports BTC3L, BTC3S, ETH3L, ETH3S, SOL3L, SOL3S, DOT3L, DOT3S, XRP3L, XRP3S, AVAX2L, AVAX2S, ADA2L and ADA2S.
- BTC3L refers to a Leveraged Token holding long positions of BTCUSDT Perpetual Contract with 3x leverage.
- BTC3S refers to a Leveraged Token holding short positions of BTCUSDT Perpetual Contract with 3x leverage.
To trade Leveraged Tokens, you can simply select them on Bybit’s Markets page, or you can select Trade and click on Leveraged Tokens (as shown above) to check and select an underlying asset. Bybit will launch more underlying tokens to offer you a wide variety of investment choices.
Investment involves risk and requires caution. Always carefully consider whether Bybit Leveraged Tokens match your risk tolerance, investment objectives and experience, financial situation and needs, and personal or other relevant circumstances. Please refer to our Risk Disclosure Statement for more details.