When BitMEX launched the Bitcoin Perpetual Forward Market (BTC) in 2016, it created a new model for cryptocurrency traders. Although it was not the first platform to offer reverse swaps with BTC settlement, BitMEX has brought ease of use and liquidity to a wider audience.
BitMEX contracts did not include fiat or stablecoins, and although the reference price was calculated in US dollars, all gains and losses were paid in bitcoin.
Fast forward to 2021, and USDT contracts become relevant. Of course, the use of USDT-based contracts makes it easier for retail investors to calculate profits, losses and margin requirements, but they also have disadvantages.
Why contracts with BTC settlement are for more experienced traders
Binance offers currency margin contracts (BTC settlement). Instead of relying on the USDT margin, the buyer (long) and seller (short) must deposit BTC as the margin.
It is not necessary to use stack coins when trading currency margin contracts. Therefore, the security risk (margin) is smaller. Algorithmically supported stack coins have stability problems, while officially supported stack coins are at risk of seizure and government control. Therefore, a trader can only circumvent these risks by depositing and redeeming BTC.
On the other hand, the lower the bitcoin price, the lower the dollar’s guarantees. This effect occurs because the contracts are denominated in US dollars. Each time a future position is opened, the amount always corresponds to the contract amount: either 1 party = $ 1 on Bitmex and Deribit, or 1 party = $ 100 on Binance, Huobi and OKEx
This effect is known as a reverse non-linear future profitability, and the buyer incurs large losses when the bitcoin price falls. The larger the difference, the lower the reference price from the starting position.
USDT stable contracts are more risky, but easier to manage
USDT-stable futures are easier to manage because returns are linear and unaffected by large fluctuations in BTC prices. Those who want to sell futures do not have to buy BTC at any time, but there are costs to having open positions.
This contract does not require active hedging to protect the security risk (margin), so it is the best option for retailers.
It should be noted that holding long-term positions in any stable currencies is associated with an internal risk that increases when using third-party custody services. This is one of the reasons why participants receive more than 11% per year on stable foreign exchange deposits.
In this decision, an important role is played by whether the investor measures the return in BTC or fiat. Arbitrage schedules and market makers tend to prefer stable contracts from the USDT because their alternative investments are either betting or low risk cash and trades.
On the other hand, cryptocurrency investors usually hold bitcoin or switch to altcoins to achieve higher returns than fixed APY. Therefore, as the preferred tool for professional traders, USDT-stable futures contracts are becoming increasingly popular.