Optimal Scenarios To Trade Leveraged Tokens VS Futures Contracts

Table of contents

The primary objective of all derivative products and leveraged tokens is not an exception, is to speculate on rising and falling markets. The difference is in the return potential, risk exposure, and contact’s price valuation.

In this article, we will cover several scenarios in which it is optimal to hold onto leveraged UP and DOWN tokens compared with an ordinary perpetual futures position. All conclusions are based on practical experience.

What are leveraged tokens?

First things first, let’s define what are leveraged tokens. As all examples are based on Binance’s leveraged tokens, all contract’s specifications and terminologies used are from Binance’s knowledge base and FAQ:

Binance Leveraged Tokens are tradable assets in the Binance spot market that give you leveraged exposure to the underlying asset. Each leveraged token represents a basket of perpetual contract positions.

The price of the tokens tracks the change in notional amount of the perpetual contract positions in the basket and changes in the multiples of leverage level.” - Binance Academy

So what that means is that the underlying asset for any leveraged token is the perpetual contract of that token. For example, the underlying asset for BTCUP and BTCDOWN leveraged tokens is BTC/USDT perpetual contact in Binance Futures. What that means is that both BTCUP and BTCDOWN are designed to speculate on fluctuations of BTC/USDT perpetual contract.

Taking all that into account, BTCUP and BTCDOWN are nothing more than just perpetual futures contracts with the only exception that they automatically maintain a constant target leverage range between 1.25x and 4x.

“BLVT is essentially a tokenized version of leveraged futures positions.” - Binance Academy

💰How leveraged tokens generate returns?

As a general rule, when the market is rising the built-in mechanism of constant rebalancing increases the leverage to boost up returns. This ensures a steady increase of leverage up to 4x maximum. Conversely, when the market is falling the system automatically decreases the leverage to reduce the risk. This results in a steadily decreasing leverage down to the lowest limit of 1.25x.

Let’s now digest the data even deeper. To grasp the potential of leveraged tokens we will cover several scenarios in which BLVT is better and worse compared with ordinary 4x leveraged futures position:

📈BTCUP performance on the sideways market

The price starts to fall shortly after a trader enters the market. The price pushes back upwards after some time. In this scenario, BTCUP is being rebalanced by the built-in mechanism functioning on an “as-needed basis”. On a falling market, the leverage diminishes to offset the risk of liquidation. As soon as the price reverts, BTCUP starts to increase the leverage up to 4x.

BTC/USDT on a 4-hours timeframe 
BTCUP token VS BTC 4x

Outcome: Hold onto the BTCUP position only if you expect the market to rally. If you see the price is starting to fall and you consider it as a short-term consolidation phase before the rally, then pay increased attention to your position. BTCUP outperforms BTC 4x futures position.

Caution: If the price goes completely in the opposite direction and the leverage is already down to the minimum of 1.25x and hence the system is no longer able to diminish the risk, consider closing your position to avoid further risk.

Below is a historical NAV chart of BTCUP leveraged tokens. We are interested in the column “Leverage before / After” as it shows the changing dynamic of BTCUP leverage. As the price of the BTC/USDT perpetual contract goes higher, BTCUP leverage increases to maximize returns. As the price falls, leverage decreases to minimize the risk.

As stated in Binance Academy:

The main goal is to prevent front-running. If these tokens rebalance at predefined intervals, there could be ways for other traders to take advantage of this known event. Since the target leverage isn’t constant, the tokens aren’t forced to rebalance unless the market conditions deem it necessary

This seems like a fair game, except the fact that we don’t know who decides when “market conditions deem it necessary”. Some traders and investors might consider this to be an effective tool to manipulate the price when Binance needs it.

📈BNBUP performance on a highly volatile uptrend

The general trend is upward, but the price swings crazy. BNBUP leverage fluctuates in a range due to extreme volatility.

BNB/USDT goes higher December 2020 - January 2021.
BNBUP VS BNB 4x 

Outcome: On a rising market the performance of BNBUP is heavily dependent on volatility. In the example with BNB/USDT, the price swung 15-20% up and down intraday, which was the primary reason that significantly affected the leverage rebalancing. Even though the trend is rising, BNBUP can not boost the leverage up to 4x due to extreme fluctuations on a road to a new ATH (all-time high).

BNBUP historical leverage chart from 21st of December until 19th of January‌‌.

📉 DOWN tokens

Any DOWN leveraged tokens follow the same leverage rebalancing principles as UP tokens. DOWN tokens are designed to generate returns on a falling market. If you bet the price is gonna fall - DOWN token is the right choice. Conversely, if you expect the price to push higher - UP token is your choice.

DOWN tokens increase the leverage up to the maximum of 4x on a falling market and decrease the leverage if the price starts to climb to reduce the risk exposure. Below is the example of when it would be optimal to trade DOWN token:

ZEC/USDT cryptocurrency pair - bearish market. The price makes lower-lows and lower-highs. Optimal market scenario to profit on a falling market.‌‌

💡 Time to sum up

BLVT is an optimal derivative for those who want to have leveraged exposure to the price of some cryptocurrencies without managing a leveraged position. The built-in mechanism of leverage rebalancing automatically boosts leverage when the price moves in the direction of a profit area and decreases when the price moves in the loss direction.

💰 Fees and other expenses

  • Daily management fee: 0.01%
  • Redemption fee: 0.1%
  • Funding fee: NO (only for futures traders)


Written by Dmitry Perepelkin