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COIN-Margined or USDⓈ-Margined, What Futures Contract Suits You?

2022-04-22

Key Takeaways: 

  • Binance Futures offers two types of futures contracts: COIN-Margined and USDⓈ-Margined contracts.

  • COIN-Margined contracts allow users to hold the underlying asset, which is beneficial for long-term investors, especially in a bull market.

  • On the other hand, USDⓈ-Margined contracts are quoted and settled in USDT or BUSD, enabling efficient calculation of returns.

Crypto derivatives are financial instruments that represent the value of an underlying digital asset. These futures contracts enable traders to profit from short-term price movements in either direction. In contrast, traders in the spot markets can only benefit when the cryptocurrencies they hold increase in market value over time. 

The crypto futures market records trillions of dollars in monthly trading volume, promoting price discovery and enabling traders to transact more efficiently. Binance Futures has captured a significant share of this market, becoming one of the most liquid derivatives exchanges in the world. 

Although there are many features in Binance Futures that are catered to traders, such as grid trading and TWAP, in the following article, we will explore the two types of derivatives contracts the platform offers.

COIN-Margined vs. USDⓈ-Margined Contracts 

Binance Futures offers a wide selection of crypto derivatives with over 500 trading pairs. Traders on the world’s leading crypto futures exchange can choose from two types of crypto derivatives, including COIN-Margined and USDⓈ-Margined contracts.

COIN-Margined contracts are settled and collateralized in their based cryptocurrency. Therefore, traders can continue to HODL their crypto assets as collateral instead of stablecoins. This type of contract is ideal for those who seek to optimize their gains during times of growth.

On the other hand, USDⓈ-Margined contracts provide a versatile settlement currency denominated in USDT and BUSD. Some traders may prefer to trade this type of derivatives contract as they represent a safer option, especially during prolonged downtrends. 

What Are COIN-Margined Contracts?

COIN-Margined contracts are a type of derivatives that obtain their value from the underlying cryptocurrency they represent. These financial tools offer an alternative way to gain exposure to cryptos without owning them. They also provide a unique opportunity for long-term investors to participate in the futures markets without converting their crypto assets to stablecoins.

HODLers can take advantage of COIN-Margined contracts to grow their portfolios because these are settled in the underlying cryptocurrency. For instance, Bitcoin-Margined contracts can return a profit in BTC, making them preferable in an uptrend. Not only can traders benefit from their profitable trades, but as prices increase, the value of their collateral also increases. 

COIN-Margined contracts simply represent a great way to increase cryptocurrency holdings over the long run.

Pros and Cons of COIN-Margined Contracts

Settled and denominated in their base cryptocurrency, Binance Futures’ COIN-Margined contracts enable traders to fund their accounts with their crypto of choice. Long-term investors don’t have to convert their digital assets into stablecoins like USDT and BUSD. Instead, market participants can continue to HODL and grow their portfolios when their trades return a profit, benefiting from the non-linear payout structure COIN-Margined contracts have. 

HODLers can hedge their positions with COIN-Margined contracts even when the markets turn red because they don’t need to sell any cryptocurrencies at a compromised price. So if the price of the underlying asset goes down, profits from the COIN-Margined trades can offset the portfolio’s losses. 

Another benefit of COIN-Margined contracts is that traders can choose between Perpetual, Quarterly, and Bi-Quarterly expirations. 

Although perpetual contracts are the most popular, funding fees are incurred, which correlate with the market's underlying trend. Funding fees may also increase when the market is in highly bullish territory, as traders are willing to pay higher fees to go long on a futures contract.

On the contrary, quarterly contracts don’t carry a fee when held for one to three months, making these trades more wallet-friendly and easier to manage and allowing investors to trade on a lower-cost basis. 

Despite all the benefits that COIN-Margined contracts, HODLers must approach these financial instruments with caution. The high levels of volatility in the cryptocurrency market can affect the purchasing power of the collateral you have allocated for trading. 

For instance, Bitcoin entered a four-month downtrend after reaching nearly $70,000 in November 2021. Long-term investors saw the value of their BTC holdings fall by more than 50% throughout this period. Such drastic trend changes in the crypto markets make it crucial for traders to be careful when trading COIN-Margined contracts.

What Are USDⓈ-Margined Contracts?

USDⓈ-Margined contracts are crypto derivatives quoted and settled in USDT, BUSD or USDC. These financial instruments represent the value of a specific asset that traders can buy or sell at a predetermined price at a specified time in the future. They’re ideal for traders because they enable exposure to cryptocurrencies without owning them. 

Traders prefer to trade USDⓈ-Margined contracts because there’s no need to worry about cryptos being bullish, bearish or stagnant. Short-selling enables traders to sell high and buy low to profit from the price difference, making market-neutral trading strategies possible. Meanwhile, leverage can result in significant gains from small price fluctuations.

USDⓈ-Margined contracts are catered to those who want to jump in and out of the market quickly to benefit from potential setups they have identified. 

Pros and Cons of USDⓈ-Margined Contracts

Settled and quoted in USDT or BUSD, Binance Futures’ USDⓈ-Margined contracts enable traders to maximize their returns on investment. They allow better capital efficiency as traders don’t have to lock up significant amounts of capital to purchase a large number of cryptocurrencies. Additionally, the settlement in stablecoins makes USDⓈ-Margined contracts more intuitive because it’s easier to calculate profits and potential losses. 

Regardless of the market's direction, traders can profit with USDⓈ-Margined contracts because they’re only required to hold USDT or BUSD as collateral. So traders can go long or short while maintaining the same purchasing power. Such versatility is essential during periods of heightened volatility as USDⓈ-Margined contracts can help hedge the risk of large price swings.

Another benefit of USDⓈ-Margined contracts is that traders can choose between Perpetual and Delivery contracts. 

Perpetual contracts don’t have an expiration date, allowing traders to keep a position to perpetuity unless liquidation occurs. Still, perpetual futures carry a funding fee that may fluctuate over time. On the other hand, delivery contracts offer a wide range of trading opportunities, including basis trading.

It’s worth noting that BUSD-Margined contracts offer lower fees and maker rebates. Traders can enjoy a fee discount with any trading pairs that include BUSD. Like any other USDⓈ-margined contract, traders also don’t need to hold the base crypto asset to fund any futures positions.

Despite all the benefits that USDⓈ-Margined contracts, traders must implement a robust risk management strategy when trading these financial instruments. Over-leveraging is one of the common reasons why novice traders fail. Not only does leverage amplify losses, but it also amplifies transaction costs. 

For instance, the cost of entering a 100x leverage position with only 500 USDT as collateral is 20 USDT since the standard taker fee is 0.04%, representing 4% of the trading capital allocated gone in fees. On top of that, if the asset moves only 1% against the position, the account can be liquidated. For this reason, traders must be cautious when trading USDⓈ-Margined contracts. 

Final Thoughts

Deciding whether to trade COIN-Margined or USDⓈ-Margined contracts depends on a trader's expertise, risk tolerance, and comfort while trading in the cryptocurrency markets. The former is more prevalent among long-term investors and HODLers, while the latter attracts traders looking to enter quick trades. 

If you’re still confused about which type of contract fits your purpose, Binance Futures offers a mock trading environment where you can trade COIN-Margined and USDⓈ-Margined contracts with zero risks. Here, you will have a risk-free starting balance of 100,000 USDT to let you experience all of Binance Futures' features. You will be able to manage your virtual portfolio in a testnet environment and experiment with different risk levels by applying leverage, placing stop-loss, and taking profit orders.

Once you have sharpened your skills, you can simply switch to trading on the main platform and join more than 28 million active traders in the world’s leading crypto derivatives exchange. 

Read the following helpful articles for more information about Binance Futures:

Disclaimer: Crypto assets are volatile products with a high risk of losing money quickly. Prices can fluctuate significantly on any given day. Due to these price fluctuations, your holdings may significantly increase or decrease in value at any given moment, which can result in a loss of all the capital you have invested in a transaction.

Therefore, you should not trade or invest money you cannot afford to lose. It is crucial that you fully understand the risks involved before deciding to trade with us in light of your financial resources, level of experience, and risk appetite. If required, you should seek advice from an independent financial advisor. The actual returns and losses experienced by you will vary depending on many factors, including, but not limited to, market behavior, market movement, and your trade size. Past performance is not a guide to future performance. The value of your investments may go up or down. Learn more here