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Mar 30
2020
Everything You Need To Know About Cross Collateral


Innovation has always been a cornerstone of Binance, which is why we continue to roll out new features to improve accessibility to our platforms and expand our ecosystem. Addressing to user demands, Binance Futures took a momentous step forward by introducing an innovative feature called Cross Collateral. 

What is Cross Collateral?

In the crypto space, Cross Collateral is an innovative feature that allows users to collateralize their crypto assets to borrow against another crypto asset. 

On Binance Futures, this feature provides users with the flexibility to utilize their crypto assets to borrow Tether (USDT) at a 0% interest rate. Subsequently, the borrowed funds can be used to trade futures contracts on the Binance Futures platform. 

How can users benefit from it?

Crypto exchanges commonly use Stablecoins such as USDT as a quote asset against many cryptocurrencies. However, users who hold cryptocurrencies such as BTC are less inclined to sell and convert them to Stablecoins as the opportunity cost may be high.

With this feature, users who do not want to hold Stablecoins such as USDT can collateralize their crypto-assets to participate in the futures market. Thus, users can trade futures contracts without the need to convert their crypto assets into USDT. 

How does it work?

Now that you’ve understood the basic details, let’s dive into the details of how Cross Collateral trading works in real life. 

As explained, Cross Collateral simply allows users to borrow funds to trade futures contracts, these loans are secured by crypto assets that you own. On the Binance Futures platform, this feature enables users to collateralize against BUSD and BTC. 

When a trader uses the Cross Collateral feature, there are 4 factors to consider:

  1. Total amount of borrowed funds in USDT 

  2. Total amount of collateral (in BTC or BUSD)

  3. Market value of collateral in USDT

  4. Loan to Value Ratio 

The loan-to-value (LTV) ratio is a measure to evaluate lending risk. The ratio measures the nominal value of a loan against the market value of its collateral. For instance, a high LTV ratio represents a high financial risk.

In the following example, we illustrate two scenarios in which a trader collateralized BTC and BUSD to secured USDT at a 0% interest rate. In this scenario, we assume the following details: 

  1. BTC/USDT at $5000 

  2. BUSD/USDT at $1

Table 1 - Illustration of Scenario 1

Source: Binance Futures

In scenario 2, we assume the market value of both assets falls:

  1. BTC/USDT decline by 20% to $4000

  2. BUSD/USDT decline by 5% to $0.95

Table 2 - Illustration of Scenario 2

Source: Binance Futures

From the following example, we observed that the value of the collateral is a key factor that influences the LTV ratio. As the value of collateral declines, the LTV ratio increases. In other words, the LTV ratio is likely to fluctuate more for collaterals that are more volatile in nature. Especially for volatile crypto-assets like BTC, users must ensure that sufficient reserves are available should its market value decline. 

Read more on Cross Collateral

Note: The minimum allowable loan amount is 10 USDT and the maximum allowable loan amount is 500,000 USDT per account.

How can users manage risk when trading with Cross Collateral?

While Cross Collateral certainly provides more flexibility and options, users also need to understand the risk involved when using the feature. As such, here are the crucial factors that users need to know when trading with Cross Collateral:

LTV Ratio - Binance Futures assess the LTV ratio to determine the level of exposure to risk a user takes on. As mentioned, the market value of your collateralized assets may fluctuate according to changes in price trends. Therefore, users must always monitor the LTV ratio before it reaches a threshold. For BTC, the maximum LTV ratio is 70%, while BUSD is capped at 90%.

Ensure sufficient reserves of collateral - To avoid liquidation, users must always ensure that sufficient reserves are available to maintain the LTV ratio under its threshold. Having adequate reserves provides a level of comfort for investors to survive volatile market conditions.

Be aware of liquidation risk and its fees - When the LTV ratio goes beyond the threshold, users are required to add collateral to reduce the risk of liquidation. If these requirements are not met, a forced liquidation will be triggered as the LTV ratio reaches the Liquidation Call level. Liquidation in Cross Collateral carries a fee that is based on 1 % of the loan amount. During extreme price movements, you might be charged both liquidation fees on collaterals and your position in futures at the same time.

Don’t over-leverage with futures contracts - Leverage is a double-edged sword. In the same way that leverage can multiply your gains, it can also compound your risks and potential losses, especially in the highly volatile crypto markets.

Additionally, users should also be aware of the liquidation processes on both Cross Collateral and their futures positions as they are independent of each other. For instance, users may face liquidation on Cross Collateral even if they have adequate reserves of USDT in their futures account. Similarly, liquidation may be triggered on their futures account but has no impact on Cross Collateral. In both scenarios, a fee will be charged on the liquidated account.

Applying Cross Collateral in real-live trading

Hedging is a risk management strategy employed to neutralize risks in a cryptocurrency portfolio. With this innovative feature, users have more options to perform risk-hedging on their crypto assets.

In the following example, we will show how traders can hedge their crypto assets through the Cross Collateral feature. 

Let’s assume Trader A decides to hedge his BTC under the following conditions:

  1. On T+0, Trader A collateralizes 1 BTC, and borrow USDT to fund futures position.

  2. Trader A opens a short position of 0.5 BTC in perpetual futures (BTCUSDT) with no leverage.

  3. On T+1, BTC prices fall 10%. 

Table 3 - The resulting profit and loss of Trader A’s position:

The scenario illustrates how users can potentially reduce their risk in black swan events. As shown, Trader A mitigated his risk by 50% through partial hedging of his BTC holdings.  

If Trader A decided not to hedge, the market value of his unhedged BTC should prices fall by 10%, will be: $5000 - 10% = $4500. As a result, the profit and loss will be -$500, which is double the drawdown of the hedged portfolio.

Growth of Cross Collateral trading on Binance Futures

Binance Futures launched the Cross Collateral feature in early February, initially allowing users to collateralize BUSD. Following the initial success, BTC was eventually added to the feature. By adding BTC as collateral, Binance Futures allows our users to capitalize on short-term price movements without selling BTC at a compromised price.

Since its inception, the cumulative USDT net lending has grown by more than 800%. In early February, total net lend was under $2 million. Today, users have collectively net-lend more than $16 million USDT, indicating 8x growth in one month. 

Chart 1 - Growth of Total net-lending on Cross Collateral

Source: Binance Futures

Since the introduction of BTC, the demand for Cross Collateral has increased exponentially. Total net lending increased from under $6 million to $16 million today, an expansion of 166% in just 2 weeks. The surge in demand was anticipated as BTC is one of the most recognized crypto assets among users both as an investment instrument and as a trading tool.

Cross Collateral expands Binance Futures ecosystem

Cross Collateral further expands Binance’s ecosystem and allows traders to fully utilize their crypto assets and manage risk in their cryptocurrency portfolio. This feature strengthens the synergies between spot and futures platforms on Binance, a key advantage that has helped differentiate Binance from its peers. 

The much-anticipated feature allows more flexibility and options of deposits for users to participate in futures markets. Long-term crypto investors can now hedge their positions in the futures market without the need to convert any of their positions into USDT. This means that they do not need to sell any BTC at a compromised price. 

With the latest feature, traders have greater access to its futures platform, thus, expanding Binance’s ecosystem further.