Leveraged Tokens (LT) will eliminate this trade-off and allow users to safely use leverage without having to worry about liquidation risks and save effort when managing a leveraged investment position.
Although LT in the past time is widely known for its advantages, it is also extremely controversial and causes misunderstanding from users. Compared to traditional leveraged margin products, LT has much less profitability in the long term.
Despite these shortcomings, LT still receives a lot of attention from global users. So, Binance took action to fix the problems of existing tokens and launched Binance Variable Leveraged Tokens (BLVT).
What is Binance Variable Leveraged Tokens?
Binance Variable Leverage Tokens (BLVTs) - Binance Mobile Leverage Tokens - are designed to overcome the limitations users often encounter in traditional leveraged tokens. Unlike the existing LTs, BLVT does not maintain a “fixed” level of leverage. Instead, BLVT uses a mobile lever frame that ranges from 1.5x to 3x.
It can be traded on the Binance spot market and derives its value from the Binance Futures non-term BTC contract. Currently, there are two types of BLVT: BTCUP and BTCDOWN.
- BTCUP allows users to get a leveraged return of 1.5 to 3x as the price of Bitcoin increases.
- In contrast, BTCDOWN allows you to make money when the price of Bitcoin falls.
BLVT will track fluctuations in the estimated value of demand positions and changes in leverage.
Why trade BLVT instead of LT?
BLVT has many advantages over traditional LT, including Mobile Leverage, Rebalancing, Liquidity, and Fee factors.
1. Mobile Leverage vs Fixed Leverage
Currently, the most popular LT product is using fixed leverage of 3x, which means the user will have a 3x chance of return on the underlying asset. For example, if BTC is up 5%, LT will bring in 15% profit for users.
Let's take a more detailed example to understand how a Fixed Leverage Token works:
Let's say the values of the base asset class and the LT 3x both start at $ 100.
- On Day 1, the value of the underlying asset increases by 5%, resulting in a 15% increase in LT 3x.
- On Day 2, the value of the underlying decreases by 5%. Similarly, the value of LT will decrease by 15%.
The P&L of the two assets at the time of T + 2 would be as follows:
As can be seen, although the underlying asset's price was almost unchanged, the 3x LT has lost more than 2% of its original value. The situation shown here is called the volatility drag. Volatility exaggeration is a long-term consequence of fluctuations in value on investment. The larger the investment value and the longer the time frame, the more severe the negative impact of volatility exaggeration.
Most users of leveraged tokens are not aware of this intangible danger of LT. Specifically, users do not know how “fixed” leverage will affect long-term profits, especially in markets that are consolidating value over a long period of time.
Let's go back to the example above but with a longer time frame (365 days), with the price of the underlying asset staying steady and slightly fluctuating within the +5% / - 5% frame. Let's look at the impact on value.
This example illustrates how to exaggerate volatility that can still negatively impact profits even when the market is sideways. It will do serious damage to those who buy and hold the 3x LT for a long time, assuming it will always follow the underlying asset's price.
To solve this problem, BLVT is designed to reduce the impact of sliding fluctuations by imposing a movable lever, from 1.5x to 3x. BLTs will have less impact in sideways markets and will be more profitable when prices have a clear direction of movement, but their value will not be influenced too much by market volatility. school.
This means that in a prolonged period of time, the value of BLVT will not tend to decrease to 0. Therefore, BLVT possesses the advantage of bringing more benefits than LT available in the long run. term.
The LT typically has a mechanism to increase or decrease exposure to the underlying asset in order to reach the target leverage for the day. As the price of the underlying goes up, it adds to the position. Conversely, if the price falls, it decreases its position. This mechanism is known as rebalancing. The existing LTs will need to be rebalanced every day to maintain their leverage targets.
For example, let's say a 3x LT has a Net Asset Value (NAV) of $ 100 million. True to design, this LT will be exposed to a base asset worth $300 million.
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Now imagine the underlying asset yields a 5% return. Here's how LT performs the rebalancing every day:
- As price increases by 5%, exposure value increases by 15% to become USD 315 million. Thanks to that, LT will increase by 15 million USD and NAV will be 115 million USD.
- Since the contact value is 315 million USD and NAV is 115 million USD, LT is no longer at 3x leverage and we can say that the ratio between exposure value and NAV is no longer in equilibrium.
- At the end of the day, LT must rebalance by adding $ 30 million to the contact value to raise this number to 345 million, or 3x of NAV.
- Likewise, if the price of the underlying falls, the LT will reduce its exposure to the underlying and rebalance to maintain 3x leverage.
Simply, if a user holds a position for more than a day, their exposure is likely to increase or decrease significantly, affecting the amount of the initial investment.
The traditional LT is programmed to rebalance at set times (usually every day). Because it can predict the time of the rebalance, LT is very easy to be picked up by users. Surf traders and arbitrage traders can predict upcoming deals and easily profit from profit margins.
However, BLVT will not be forced to rebalance unless the damage is too great. BLVT will only re-balance positions if necessary to maximize profits when prices rise and minimize losses to avoid liquidation. This will make it impossible for "normal" movements in the market to lead to a rebalance, and the value of the token will maintain a correlation with the underlying asset's value.
3. Market liquidity
Binance will be the only entity that issues and offers BLVT, helping users buy tokens at a more affordable price, and if the total token supply runs out, Binance will be able to quickly pump more money, issue new tokens and sell them to the market. This ensures that users can always effectively trade tokens and execute orders at a reasonable price.
Besides, Binance is committed to BLVT that will always be able to be bought or sold within 10% of NAV. There won't be any "price squeeze" action - BLVT will not be able to be sold on Binance without these price limits being met.
4. Transaction fees and surcharges
Binance Mobile Leverage tokens have lower fees than existing leverage tokens. BLVT will charge a daily management fee of only 0.01%, with an annual fee it will be 3.5%, while the daily management fee on other platforms sometimes up to 0.03%.
BLVT users can exit positions by selling tokens on the Spot market or exchanging them according to the market value of NAV. In both cases, users will be charged a transaction fee or an exchange fee. The user can redeem tokens at any time, but this will be more expensive than selling directly on the Spot market, and therefore should not be opted for if the exchange is normal.
There are 3 types of fees related to BLVT: Transaction Fee, Exchange Fee, and Daily Management Fee.
A transaction fee is charged when buying or selling tokens on the spot market, with the same fee schedule as the spot transaction fee.
The exchange fee is charged when users redeem tokens, currently set at 0.1% per exchange.
Management fee of 0.01% daily or else depending on the token will be charged and reflected directly in NAV.
Besides, users should note that BLVT's underlying leveraged positions also have fees for funding. These fees are paid based on the funding rates and are reflected directly into NAV. Binance will not charge fees for transfer funds because they are direct transactions between users.
Binance Mobile Leverage Tokens are a safer investment tool in the long term than current leverage tokens. BLVT's innovations are designed to address the controversial aspects of traditional leveraged tokens, protecting users against LT's negative long-term effects.
Although BLVT is not an alternative to holding assets in the spot market, it is still a possible long-term investment option. If users correctly predict the direction of the market, they will profit from BLVT trading. It offers a variety of benefits to increase returns, minimize risks to users' capital investment, and give users the opportunity to profit even when the market fluctuates.
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