As tempting as it is to buy digital currencies using perpetual futures contracts, there are some hidden pitfalls to watch out for.
In recent years, several exchanges began offering altcoin futures traded in USDT and stablecoins, which eventually became the standard. This change is more appropriate for most traders, but it still poses serious problems for those looking to keep long positions open for more than two weeks.
Before opening a trade on a stock exchange offering permanent futures contracts, traders should be aware that stronger weeks can lead to stop losses, investors lose the opportunity to participate in their alternative currencies for profitable profits, and variable funding rates can increase. the cost of making a deal. …
Use leads to stronger weeks
No matter how liquid the market is, leverage will lead to stronger weeks. While these measures usually do not result in forced liquidation, they can delay investors.
Hence, the possibility of fake weeks is the main reason traders avoid dealing with futures positions for a long time.
Futures liquidation mechanisms use a price index composed of several (conventional) spot exchanges to avoid price increases. Consequently, the system will only close trades with insufficient margin when the index is stopped.
Notice how ETH fell $ 326 on Coinbase, while Binance futures also fell $ 302. This change may seem small, but it definitely led to the trader’s stop orders.
There is a way to avoid such problems simply by placing some stop orders on Mark Price (Index) instead of Last Price.
Making this simple change will avoid settlement if the futures contract is monetary separated from the index. The big problem is that not all exchanges offer this feature.
Mining can provide better liquidity and profit
Buying alternative currencies prevents anyone from using futures contracts for games or loans. For investors looking to take a long-term position, this is another factor to consider.
There are many platforms offering deposit and lending services, including leading central centers. Some of the altcoins that offer 30-day contractual yield (APY), which can range from 7% to 18%, are Polkadot (DOT), Tron (TRX), Cosmos (ATOM), and Cardano (ADA).
Decentralized Mining Pools (DeFi) are another way to generate income through the use of alternative currencies. Users should beware of risks in this sector, especially those pools that are losing vulnerability between two different cryptocurrencies.
Therefore, having chosen the eternal future, a person will not be able to participate in harvesting and growing crops. This may not affect the decision of those who opt for short-term price fluctuations, but over the weeks they will gain weight.
Beware of fluctuating funding rates
Perpetual contracts, also known as reverse swaps, have a built-in rate that is usually charged every eight hours. Funding exchange rates ensure that there are no currency risk imbalances. Although the open interest for buyers and sellers is always the same, leverage can vary.
When buyers (long positions) require more leverage, the funding rate becomes positive. Consequently, these buyers will pay a commission. This problem is especially true during bullish periods when there is usually more demand for long trades.
The chart above shows a bullish trend at the end of July and it is clear that Ether (ETH) has risen from $ 230 to $ 380, which is also a constant funding rate. After an average of 1.8% over three weeks, this negatively affected shopper income.
Again, this may not be harmful to those in short-term positions, but it increases with each passing month.
To avoid this drawback, you can use margin instead of futures contracts. Loans usually cost from 0.5 to 1.4% per month, and the maximum leverage ranges from 3x to 10x.
As with permanent futures contracts, investors must also deposit margin in order to gain access to these markets.
It should be noted that some exchanges allow users to manually select rates and specify loan periods. This method is much better because it avoids the surprises that naturally occur during active shopping.
While perpetual futures trading is a great tool, it has some drawbacks. Among them are stronger weeks that stop losses, inability to participate and variable funding rates.