The dangers of Leveraged Tokens
Most experienced traders know that leveraged tokens should be avoided at all cost. Exchanges advertise these products to ignorant traders who are afraid to trade on leverage, with phrases like "Now you can use leverage without the risk of liquidation!". Be aware that these products have been carefully designed to take your money, and then some.
The underlying algorithms are incomprehensible for anyone without a higher level math degree (myself included), but a look at price action is all we need.
While in theory you may not get liquidated, during certain events it is possible for leveraged tokens to depreciate immensely in value. This happened for example during the May flash crash, where a cascade of liquidations of the underlying assets combined with rebalancing events caused some leveraged tokens to loose up to 95% of their respective value. See the SUSHIUP token for example in the image below. The token dropped around 93% in a single day and is currently trading at a wopping -98.7% of their pre-crash value.
While technically this might not be a liquidation, in practice this comes down to the same thing.
To make matters worse, during the flash crash, DOWN tokens also took a nosedive leaving a legion of traders outraged.
Binance say they warn against these types of major price drops during times of extreme volatility. They did however offer some (very meagre) compensation to those affected when agreeing to the condition that you would be banned from trading leveraged tokens ever again.
For those still holding on to their leveraged tokens from before the crash in the hope that they will one day recover, have a look at the image below. The image shows what volatility does to leveraged tokens over time compared to the value of their underlying assets. The image shows the performance of ETH vs ETHUP (Binance), ETHBULL (FTX) and ETH3L (Kucoin) over a period of 4 weeks. Volatility (both up and down swings) eats away at the value of your tokens. October 8th ETH was trading at the same level as a previous high, the leveraged tokens not so much.
In short, your tokens will never recover. Sell them at a high or top of a bull run and put your money elsewhere.
Conclusion, stay away from leveraged tokens and just use 3X leverage instead, which also makes it near impossible to get liquidated anyway.
The underlying algorithms are incomprehensible for anyone without a higher level math degree (myself included), but a look at price action is all we need.
While in theory you may not get liquidated, during certain events it is possible for leveraged tokens to depreciate immensely in value. This happened for example during the May flash crash, where a cascade of liquidations of the underlying assets combined with rebalancing events caused some leveraged tokens to loose up to 95% of their respective value. See the SUSHIUP token for example in the image below. The token dropped around 93% in a single day and is currently trading at a wopping -98.7% of their pre-crash value.
While technically this might not be a liquidation, in practice this comes down to the same thing.
To make matters worse, during the flash crash, DOWN tokens also took a nosedive leaving a legion of traders outraged.
Binance say they warn against these types of major price drops during times of extreme volatility. They did however offer some (very meagre) compensation to those affected when agreeing to the condition that you would be banned from trading leveraged tokens ever again.
For those still holding on to their leveraged tokens from before the crash in the hope that they will one day recover, have a look at the image below. The image shows what volatility does to leveraged tokens over time compared to the value of their underlying assets. The image shows the performance of ETH vs ETHUP (Binance), ETHBULL (FTX) and ETH3L (Kucoin) over a period of 4 weeks. Volatility (both up and down swings) eats away at the value of your tokens. October 8th ETH was trading at the same level as a previous high, the leveraged tokens not so much.
In short, your tokens will never recover. Sell them at a high or top of a bull run and put your money elsewhere.
Conclusion, stay away from leveraged tokens and just use 3X leverage instead, which also makes it near impossible to get liquidated anyway.
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