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Token of the Week: FTX Leveraged Tokens

Background

FTX leveraged tokens are a special asset class designed to give investors leveraged exposure to cryptocurrency markets. Initially introduced by the FTX exchange, this leveraged cryptocurrency has since found its way into other exchanges.

Most of the leveraged FTX tokens are issued on the Ethereum blockchain, commonly referred to as ERC-20. They stand out from other tokens as they offer leveraged positions in the crypto market while shielding investors from collateral, margins, funding rates, and liquidation. 

However, it is important to note that leveraged tokens can lose significant value regardless of the market moving sideways; therefore they’re ill-suited for long-term holding.

Besides that, they function like any other cryptocurrency as they run on a blockchain. They can be bought, stored, or transferred from one address to another while maintaining the leveraged exposure. 

Use cases

FTX leveraged tokens are a family of financial products that offer investors exposure to various digital assets. Here’s a few examples to highlight the use cases. 

BULL/USD, for instance, is an ERC token that has all the attributes of a leveraged FTX token. The cryptocurrency seeks to return three times the daily return of Bitcoin cryptocurrency. For instance, if the Bitcoin price were to move up by 1%, the BULL token would appreciate by 3%. Likewise, if Bitcoin were to move down by 1%, the BULL value will depreciate by 3%.

The BEAR token is the inverse of the BULL token designed to give leverage exposure to Bitcoin. The token represents 3x short exposure to BTC price. If BTC’s price were to move down by 2%, the BEAR value would tank 6%.

Tokenomics

A FTX token represents leverage position. Additionally, they can be redeemed through the FTX exchange or traded in other markets. For instance, if you wish to issue 100 USD worth of BULL tokens, you can transfer the amount to the FTX exchange. In return, a 300 USD position will be opened on BTC/USD given that the BULL token represents 3 X long exposures to BTC.

In this case, the trading account will have a $300 USD long position on the BTC/USD future market representing $100 worth of BULL leveraged tokens. Likewise, if you wish to redeem the $100 worth of BULL tokens, the account representing the tokens will close the long open position worth $300 on BTC/USD. In the end, you will end up with the initial $100.

FTX Leverage Tokens Rebalancing

FTC tokens achieve target leverage every day at 00:02:00. During this time, all the accounts that represent the tokens rebalance by either buying or selling assets on the perpetual futures market. If the accounts made money, they would invest the profits by buying assets to increase leverage. If they lost money, they would sell some of their position to decrease leverage.

Additionally, FTX tokens rebalance during periods of high volatility. For instance, if Bitcoin were to move down by more than 10% in a day, the BULL token will rebalance before the date to prevent market liquidation.

FTX Tokens Advantages

FTX leveraged tokens are best known for their ability to manage risks. In this case, holders don’t have to worry about margin, collateral, or liquidation prices.

While these tokens exist in the blockchain, it is pretty easy and straightforward to move them between exchanges or withdraw to an exchange.

FTX Tokens Drawbacks

FTX are high-risk products that are still in the experimental stage, and the tokens are not intended for long-term holding. Therefore, comparing FTX leveraged tokens with historical performance can be difficult.

In addition, FTX leveraged tokens work best during periods of high market momentum and perform inconsistently when the markets are in consolidation mode.

Recent developments

FTX Trading Limited recently announced a deal to acquire e-game naming rights from TSM, the premier global esports organization, for $210 million. This deal is considered the largest in esports history. 

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