In a bull market, how should you choose between spot and leveraged tokens?

Many people are currently looking forward to the big bull market next year, but the price of Bitcoin has been hovering below $20,000 in the short term, which may make everyone impatient. Because from the past data, at the end of 2016, the price of Bitcoin easily surpassed the previous high, but now it is still hesitant. Today we will analyze it from an investment perspective.

The new term leveraged tokens has appeared in major exchanges recently. Some people who don’t pay much attention may not pay attention to it, but people who trade frequently should be more familiar with leveraged tokens.

Before 312, many people held leveraged perpetual contracts of some coins, so they were buried in the end. Afterwards, many people believed that 312 was a deliberate strangulation operation of the main force on triple leverage. Due to the margin system of contract trading, many people stopped doing contract trading after 312, and the contract trading market shrank rapidly.

At this time, some exchanges, such as FTX, have become popular for leveraged token trading, which has made many people see something different. Leveraged tokens actually leverage the price of tokens. This method is actually to force price corrections at fixed times, so that the increase or decrease is three times that of the original currency. The advantage is that there will be no liquidation, so it has won the favor of many speculators. Recently, the price of coins has skyrocketed, and many exchanges have displayed the increase of leveraged tokens at the top of the increase list. Naturally, this has attracted everyone's attention.

At this time, many people may think that leveraged tokens are pretty good because they will not be liquidated. Theoretically, if Bitcoin is bullish in the long term, then you should buy leveraged tokens that are three times bullish on Bitcoin. As long as you hold it for a long time, you will definitely make money. Is this really the case?

In fact, it is not necessarily the case. Although leveraged tokens are an upgraded version of contract trading, they still have certain defects and not everyone can buy them casually. Here we introduce them one by one:

1. Management Fee

Similar to contract trading, leveraged tokens have a cost to hold because of the leverage, and this cost is the management fee. Currently, the management fee of most leveraged tokens is around 10% annualized. Different exchanges have different regulations, but they are basically the same. Most of them are charged on a daily basis, such as charging the management fee of leveraged tokens once a day.

After the exchange collects management fees, it can issue leveraged tokens. Generally speaking, leveraged tokens are a sure-win business for exchanges, and the main source of income for exchanges is management fees. Let’s give an example here.

For example, if an exchange wants to issue a three-fold long leveraged token for 100 bitcoins, then the exchange must also issue a three-fold short leveraged token at the same time, so as to achieve a balancing effect. In other words, for the same token, after adding leverage, the exchange will charge more than 20% in management fees each year, and this profit can be said to be huge.

2. Token volatility

If management fees are a pitfall, then another one is the volatility of leveraged tokens. This pitfall may be even bigger, so we will focus on it.

The most confusing thing about leveraged tokens is that when the price fluctuates continuously within a range, it is easy for the participating holders to suffer losses.

People in the currency circle generally believe that Bitcoin will inevitably rise in the long run, but the problem is that in the short term, it may fall. So it’s like in an ideal situation, you will definitely become rich in the end, but often you can’t wait for that day, and volatility is the nemesis of triple longs.

Simply put, if a Bitcoin worth $10,000 rises by 10% on the first day, then the triple leverage token will rise by 30%, the original coin price will become $11,000, and the triple leverage long price will become $13,000.

The next day, the coin price fell by 10%, and the triple leverage also fell by 30%. At this time, the prices became 1.1*0.9=0.99 million US dollars and 1.3*0.7=0.91 million US dollars respectively.

On the third day, the currency price rose by another 10%. At this time, the triple leverage also increased by 30%. At this time, the prices became 0.99*1.1=10,890 USD and 0.91*1.3=11,830 USD respectively.

On the fourth day, the price of the currency fell by another 10%. At this time, the triple leverage also fell by 30%. At this time, the prices became 1.089*0.9=0.9801 million US dollars and 0.8281 million US dollars respectively.

For the triple short leverage in the above example, it may not be as profitable as everyone imagines, but it may be a loss. The final price is 1*0.7*1.3*0.7*1.3=0.8281 million US dollars. In the past few days, the price of the currency has only lost about 2% compared to the last day, while the leveraged tokens lose money regardless of whether they are long or short.

It is also worth noting that this is only a 10% amplitude. If we expand the amplitude to 20%, we will calculate

The original token was worth $10,000, it rose 20% on the first day, fell 20% on the second day, rose 20% on the third day, and fell 20% on the fourth day.

At this time, the price of the original token was $92,160, and the three-fold long position was $40,960.

Therefore, at this time, the profits may actually be taken away in many cases, and many people are unaware of it.

For spot transactions, this situation will not occur. You will get as many coins as you want, and as long as you do not make any operations, you will not lose a penny. This is the charm of spot transactions.

Summarize

For the bull market, it is actually better to just hold the spot seriously and try not to do leveraged token trading or contract trading. As long as leverage is added, you are basically destined to do short-term trading. Never use leverage with long-term thinking. Once such a misconception occurs, you may lose a lot.