When BitMEX launched its Bitcoin (BTC) perpetual futures market in 2016, it created a new paradigm for cryptocurrency traders. While this wasn’t the first platform to offer inverse swaps with BTC processing, BitMEX brought ease of use and liquidity to a wider audience of investors.
BitMEX contracts did not include fiat or stablecoins, and although the reference price was calculated in USD, all profits and losses were paid in BTC.
Fast forward to 2021, and the contracts handled by Tether (USDT) have become more relevant. Using USDT-based contracts certainly makes it easier for retail investors to calculate their profit, loss and margin required, but it also has disadvantages.
Why BTC-processed contracts are for seasoned traders
Binance Coin Edge Perpetual Futures. Source: Binance
Binance offers coin contracts (BTC-settled contracts). In this case, buyers (long) and sellers (short) have to deposit BTC as margin instead of relying on the USDT margin.
There is no need to use stable coins when trading coin contracts. Therefore there is less risk for collateral (margins). Stabilized coins backed by algorithms have stabilization issues, while the fiat backed coins run the risk of confiscation and government controls. Hence, a trader can avoid these risks by only depositing and redeeming BTC.
On the negative side, when the price of BTC falls, the USD collateral also falls. This effect occurs because the contracts are priced in USD. When a futures position is opened, the amount is always in the contract amount, either 1 contract = 1 USD for Bitmex and Deribit or 1 contract = 100 USD for Binance, Huobi and OKEx.
This effect is known as the nonlinear inverse future rate of return and the buyer suffers more losses when the BTC price collapses. The difference increases the further the reference price moves down from the starting position.
USDT-cleared contracts are riskier but easier to manage
USDT-cleared futures contracts are easier to manage because the returns are linear and not affected by sharp BTC price movements. For those willing to sell the futures contracts, there is no need to buy BTC, but there is a cost to keep open positions.
This contract does not require active hedging to protect the risk of collateral (margins). Hence, it is a better choice for retailers.
It should be noted that carrying long-term positions on stable coins carries an embedded risk that increases when third party custody services are used. This is one reason why stakers can get over 11% APY on stable coin deposits.
Whether an investor measures the return in BTC or Fiat also plays a large role in this decision. Arbitrage desks and market makers generally prefer USDT-cleared contracts as their alternative investments are either stakes or low risk cash and carry deals.
On the flip side, retail cryptocurrency investors typically hold BTC or switch to altcoins for higher returns than a fixed APY. USDT-cleared futures are therefore the preferred instrument of professional traders and are becoming increasingly important.
The views and opinions expressed are those of the author only and do not necessarily reflect the views of Cointelegraph. Every investment and trading step is associated with risks. You should do your own research when making a decision.