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How To Expand Your Trading Opportunities With DeFi Index Futures

2021-11-23
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Key Takeaways:

  • The DeFi Index Futures tracks the overall performance of DeFi coins and tokens on Binance Futures.

  • It is part of the USDⓈ-Margined Perpetual Futures product line. 

  • Investing in DeFi Index Futures can be a useful tool for portfolio diversification or hedging.

Trading in the cryptocurrency industry can be difficult and exciting at the same time. Traders need to tap into an immense depth of knowledge and make split-second decisions. Not only should traders learn about the cryptocurrencies they are trading with, but they should also study how the market operates and reacts to up and downtrends. 

Since 2020, a year after Binance and Paxos created BUSD, Binance Futures has begun expanding its role in the DeFi world. Now, users can participate in this growing market sector via BUSD, another piece of the trading puzzle has been revealed.

What Is DEFI Index Futures?

Binance Futures offers a vast landscape with many options to trade. As more and more people have joined the DeFi world, the entire ecosystem has flourished, offering new assets to trade with. 

The DeFi Index Futures  is a tradable asset offered on Binance Futures under the USDⓈ-Margined Perpetual Futures product line. 

To further understand this, it’s useful to know what an index is. An index is a tool used to track an asset or group of assets’ performance. The measurement is taken to replicate the actions of a specific segment of the market. 

Therefore, the DeFi Index is designed to track the overall DeFi performance of cryptocurrencies available on Binance Futures. Its value is calculated with a weighted average price of its components. These sorts of futures trades consider variations that reflect the conditions of market capitalization and volume.

Some of the DeFi protocols weighted into DeFi Index Futures include BAND Protocol, Compound, Kava.io, Aave, Chainlink, Kyber Network, Maker, Swipe, Synthetic Network Token and 0x.

Under extreme circumstances such as a delisting or a significant drop in organic volume, Binance Futures makes adjustments that recalculate the weight of the market segment. The trading platform also makes adjustments whenever there is a hard fork, airdrop, or mapping.

Benefits of Trading DeFi Index Futures

Much like trading with non-traditional crypto derivatives like COIN-Margined Futures, USDT/BUSD-Margined Futures, and multi-asset futures, there are explicit benefits inherent to DeFi Index Futures too. Not only does the DeFi Index Futures offer a distinct capital efficiency, it is incredibly useful for a handful of other reasons shown below.

1. Asset Allocation

Instead of holding or investing into a broad portfolio and using multiple contracts to cover a range of assets, traders can allocate a sizeable portion of their portfolio into Binance’s DeFi Index Futures. Since the index measures, weighs and values over ten decentralized finance assets, the segment becomes a varied, nuanced and more balanced asset. Traders can balance risk by dedicating their portfolio's assets to capture Binance’s full spectrum of investment opportunities in the DeFi sector.

2. Performance Measurement

DeFi Index Futures offer traders new information for analysis. Since an index tries to recreate multiple pieces of the market segment, the performance of multiple assets has a new effect on asset allocations. 

Instead of tracking the performance of a singular cryptocurrency like Bitcoin, where volatility is highly present and uncertainty in price action is common, the performance of a synthesized index segment provides a typically less volatile experience. 

Traders also have a better time targeting investment mandates with DeFi Index Futures than other cryptocurrency trading options.

3. Hedging or Diversification

Hedging against risk using a USDT DeFi Perpetual Contract is more efficient than with other hedging options. When long-term investors with DeFi tokens use the index as a short hedge to reduce price volatility, they are often rewarded by capital efficiency native in these perpetual contracts. 

Traders can also diversify their investments by allocating their capital across the range of DeFi tokens Binance Futures offers. Investing in these weighted assets can be cheaper and more efficient because of the sometimes superior performance in the index.

4. Short-Term and Momentum Trading

Since DeFi is a growing market, the DeFi Index Futures can represent exciting trading opportunities for short and long-term traders. 

With DeFi Index Futures, traders can capture short-term trends for flexible and reactive strategies making these contracts excellent for market conditions that change often. Due to the available leverage, traders can maximize on relatively small price movements and create profits like any other form of derivatives trading.

How to Trade DeFi Index Futures?

Binance Futures offers a DeFi Index segment that supports around ten specific projects that are all growing and changing in their own time. 

Traders can start trading this sort of asset on Binance Futures without needing to worry about expiration dates and the funding rates that diverge in prices between the index and perpetual contract markets, or settlement as these contracts are settled in USD.

For those interested in getting started with DeFi Index Futures (DEFIUSDT), the min/max contract size is set at 0.001/10,000. Leverage can be set at up to 50x, and the base initial margin rate is 2% (maintenance margin rate at half that). The liquidation fee is 0.75%. 

Spread Trading Example

Users can set up trades with DeFi Index Futures that cover spreads. 

For example, traders can open a short position on an entire DeFi index, but at the same time can open a long, perpetual contract for an individual DeFi asset like COMPUSDT. As long as the trader is utilizing USDT to open and settle the positions, the index and the projects included within it can all be traded in conjunction with one another.

This is excellent for traders in the DeFi industry who expect one project or asset to perform better or worse than other index projects. The ability to hedge against a piece of an index can allow for a stronger portfolio performance over time. 

Conclusion

As with any form of trading, it’s important to remember the fundamentals. Although DeFi Index Futures can provide traders more stability and efficiency when trading thanks to coverage over an entire market segment, derivatives trading in any form is still highly risky. 

The risk/reward ratio in any futures trading asset should be accounted for before beginning to trade. 

For more guidance material on how to trade responsibly and derivatives contracts available on Binance Futures, head over to Binance Academy!

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.