When Do Leveraged Tokens Do Well?


Obviously the BULL tokens do well when prices go up, and the BEAR tokens do well when prices go down.  But how do they compare to normal margin positions?  When does BULL do better than a +3x leveraged position, and when does it do worse?

Reinvesting Profits

Leveraged tokens reinvest their profits.  That means that, if they have positive PnL, they'll increase their position size.  So, comparing ETHBULL to a +3x ETH position: if ETH goes up one day and then up again the next, ETHBULL will do better than +3x ETH, because it reinvested the profits from the first day back into ETH.  However, if ETH goes up and then falls back down, ETHBULL will do worse, because it increased its exposure.

Reducing Risk

Leveraged tokens reduce their risk if they have negative PnL to avoid liquidations.  So, if they have negative PnL, they'll reduce their position size.  Comparing ETHBULL to a +3x ETH position again: if ETH goes down one day and then down again the next, ETHBULL will do better than +3x ETH: after the first loss ETHBULL sold off some of its ETH to return to 3x leverage, while the +3x position effective became even more leveraged.  However, if ETH goes down and then back up, ETHBULL will do worse: it reduced some of its ETH exposure after the first loss, and so took less advantage of the recovery.


As an example, comparing ETHBULL to 3x long ETH:

ETH daily prices ETH 3x ETH ETHBULL
200, 210, 220 10% 30% 31.4%
200, 210, 200 0% 0% -1.4%
200, 190, 180 -10% -30% -28.4%



In the above cases, leveraged tokens do well--or at least better than a margin position that starts out the same size--when markets have momentum.  However they do worse than a margin position when markets mean-revert.

A common misconception is that leveraged tokens have exposure to volatility, or gamma.  Leveraged tokens do well if markets move up a lot and then up a lot more, and poorly if markets move up a lot and then back down a lot, both of which are high volatility.  The real exposure that they have is primarily to price direction, and secondarily to momentum.









  1. None of this is investment advice.
  2. Much of the above analysis ignores any difference between futures and spot prices, and ignores the effects of fees.
  3. Leveraged tokens greatly reduce the risk of liquidation but cannot make it fully impossible; if markets instantaneously gap down 50%, there is nothing that can stop a +3x leveraged position from getting liquidated.
  4. Leveraged tokens, like the rest of FTX, are not being offered to US users.





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