Since the inception of cryptocurrency trading, derivative markets have played a significant role in the development of the industry. Derivative markets today are essential to the dynamics of cryptocurrency prices, and they have made significant strides in recent years, accounting for more than 54 percent of all cryptocurrency transactions.
There has been an equally increasing demand for leveraged crypto products that are comparable to those that we see in the forex and stock markets as the number of forex traders, retail traders, and financial institutions entering the cryptocurrency market has grown significantly. This post will discuss how leverage tokens on KuCoin operate, as leverage tokens are currently all the rage in the crypto-currency industry.
What are Leverage tokens?
We must first study the fundamentals of cryptocurrency before we can understand how leverage tokens on KuCoin work. Leveraged tokens, also known as leveraged crypto derivatives, are digital assets that can be used to invest in the cryptocurrency market.
Each leverage coin corresponds to a collection of perpetual contract exposures. A significant change in the value of the perpetual contract positions, as well as the chosen leverage, is represented by the change in the price of the leverage token.
In contrast to margin trading, which allows you to take a leveraged position without putting up any collateral, maintaining a margin, or worrying about liquidity risk, Leverage tokens’ perpetual contracts have no expiration date, which means you can keep them for as long as you want without incurring any additional costs.
Because Leverage tokens are classified as an asset-backed derivative, and because they are leveraged, traders like you and me can earn far bigger profits than we would if we traded on the spot market alone.
How do Leverage Tokens on KuCoin work?
The use of leverage tokens on KuCoin is pretty straightforward. On KuCoin, leverage tokens are represented by a ticker name that comprises the underlying cryptocurrency, the leverage, and the direction of the trade — long or short — as well as the direction of the trade.
Consider the case of BTC3L, which is a leveraged cryptocurrency that is 3x bullish on Bitcoin. If the price of one Bitcoin grows by 1 percent, then the price of BTC5L climbs by 5 percent, resulting in more income. So BTC3S is a leveraged cryptocurrency that is 3x pessimistic on the bitcoin currency. This means that if the price of one Bitcoin drops by one percent, you’ll make three times the amount of money you would have otherwise.
Leverage tokens are thrilling, but they aren’t suitable for everyone. Furthermore, you should avoid purchasing Leverage tokens until you have thoroughly researched and understood them.
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Here are a few things you should know about KuCoin’s Leverage tokens:
They Automatically Rebalance to Maintain Leverage
On KuCoin, leverage tokens are not constant in the same way that regular tokens are. While experiencing significant volatility and/or price changes, they must regularly rebalance their positions. Leverage tokens are based on a variety of algorithms that, in essence, manage the rebalancing of the positions of the leveraged tokens in the market. In order to get the maximum possible correlation between the leveraged tokens and the underlying asset, these methods are used. Throughout the day, between 11:30 PM and 11:45 PM UTC, rebalancing takes place on the KuCoin exchange.
Additional Fees
Like exchange-traded funds (ETFs) in traditional capital markets, leverage tokens in the cryptocurrency market can draw a significant amount of fees. However, while most exchanges charge trading fees for their leveraged goods, trading leverage tokens on KuCoin incurs the same fees as trading on the spot market, which is a significant advantage.
You will, however, be charged a subscription price of 0.1 percent per subscription, a redemption fee of 0.1 percent, and 0.045 percent management fees in addition to the subscription fee.
They’re better for Short-term investments
Leveraged tokens are contracts that have no expiration date and are eternal in nature. You can purchase them and hold them for as long as you wish; however, doing so is not recommended due to the volatility decay and additional expenses associated with doing so.
It is important to remember that the cryptocurrency market is extremely volatile, and that holding leverage tokens for an extended period of time increases the likelihood of losing money. It is believed that you would lose more money using leverage tokens than you will when HODLing cryptocurrency.
They’re more suited for Advanced Traders
A great deal of danger is associated with leverage tokens, and you may incur a financial loss if you do not have sufficient experience and information regarding leverage tokens prior to making an investment in them. Due to the high level of daily market analysis required and the patience required to ride out short-term volatility, we do not advocate leverage trading or leverage tokens for new investors who are just getting started in the financial markets.
Conclusion
As a result of their exposure to trading in the spot crypto market with leverage without the need for margin or collateral, leverage tokens have gained a significant amount of interest. Despite the fact that they do not have an expiration date, they perform best when used as short-term investments.
Before you invest in KuCoin’s Leverage tokens, you should educate yourself on the subject of leverage trading and conduct due research.
