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The Pros and Cons of COIN- & USDT-Margined Contracts: How Do They Impact Your Returns?

2020-09-30

Key Takeaways:

  • COIN-margined contracts are denominated and settled in the underlying cryptocurrency.

  • On the other hand, USDT-margined contracts are denominated and settled in USDT.

  • The former is ideal in bull markets while the latter is better suited for hedging. 

 

Binance Futures offers one of the most comprehensive ranges of crypto derivatives in the industry with over 500 trading pairs. Currently, the futures product line consists of two types, COIN-margined and USDT-margined futures contracts. The former was first introduced in Q2 2020 while the latter was launched in September 2019.

In the following article, we compare the two futures products and analyze how different settlement methods can benefit you and possibly maximize your returns in the long run. 

Contract Specifications

To begin, we compare the contract specifications of both COIN-margined and USDT-margined products. 

COIN-margined

contracts

USDT-margined

contracts

Margin

Cryptocurrency

(i.e. BTC, ETH)

USDT

Margin Type

Isolate/Cross

Isolate/Cross

Settlement

Yes

No

Cross Collateral

No

Yes

COIN-margined contracts on Binance Futures offer the following characteristics:

  • Settlement in Crypto - Contracts are denominated and settled in the underlying cryptocurrency, eliminating the need to hold stablecoins as collateral.

  • Contract Multiplier - Contract multiplier represents the value of a contract. Each BTC futures contract represents 100 USD while each ETH futures contract represents 10 USD. For example, 1,000 USD of BTCUSD Quarterly 1225 (100 USD x 10 contracts) and 1,000 USD of ETHUSD Quarterly 1225 (10 USD x 100 contracts).

  • Expiration - Perpetual, Quarterly, and Bi-Quarterly

On the other hand, USDT-margined contracts offer the following characteristics:

  • Settlement in USDT - Contracts are denominated and settled in USDT, providing a versatile settlement currency across the USDT-margined futures product line.

  • No Expiration Date - You can hold positions without an expiry date and do not need to keep track of various delivery months, unlike traditional futures contracts. 

  • Clear Pricing Rules - Each futures contract specifies the base asset's quantity delivered for a single contract, also known as "Contract Unit."  For instance, BTC/USDT, ETH/USDT, and BNB/USDT futures contracts represent only one unit of its respective base asset, similar to spot markets. 

Pros of COIN-Settled Futures

Binance Futures’ COIN-margined contracts are denominated and settled in its base currency. To open a position in BTCUSD Quarterly 1225, you can simply fund the initial margin in Bitcoin. Therefore, you do not need to convert Bitcoin to a quote asset such as Tether (USDT).

If you are a miner or a long-term investor, this is ideal for you. Especially in this bull market today, investors are more inclined to hold on to their cryptocurrencies. As contracts are settled in the underlying cryptocurrency, any profits can contribute to your long-term stack. Furthermore, as prices continue to rise, the value of your collateral will increase correspondingly, representing a great way to increase your cryptocurrency holdings over the long run. 

With COIN-margined futures, miners and long-term investors can also hedge their positions in the futures market without converting any of their holdings into USDT. As such, they do not need to sell any cryptocurrencies at a compromised price.

To hedge, you can simply open a short position in any Binance Futures’ COIN-margined quarterly futures. If the price of the underlying asset goes down, profits from the futures position can offset your portfolio’s losses. 

Cons of COIN-Settled Futures

You have to enforce tighter risk controls when trading COIN-margined futures as the underlying collateral is often exposed to price volatility. Unlike stablecoins such as USDT, most cryptocurrencies experience high volatility several times in a year. These trends may persist for months before stabilizing.

For instance, Bitcoin experienced a prolonged bear market in the second half of 2019 before recovering in early 2020. In this period, investors saw the value of their BTC holdings fall dramatically and on March 12, 2020, Bitcoin marked one of its worst trading days in history after a price plunge of more than 40% in a single day. 

In these situations, traders need to react quickly to hedge their exposure via a futures contract to protect themselves against downside risk. Ultimately, this is the main function of the futures market. 

Due to price volatility in the underlying asset, COIN-margined futures have a non-linear payout structure:

Assume the price of Bitcoin is now $10,000. On Binance, one BTC-margined contract is worth $100. Therefore, in BTC terms, one contract costs: $100/$10,000 = 0.01 BTC. 

Suppose you go long 1 contract at $10,000. By doing this, you are essentially short 100 USD and long an equivalent value of Bitcoin. Conversely, by short-selling a contract, you are long USD and short an equivalent value of Bitcoin. If Bitcoin’s price goes up against USD, this means that you can buy fewer Bitcoin with the same amount of USD and vice versa.

The graph below shows the profit and loss comparison between a non-linear and linear payout as Bitcoin's price moves by increments of $1,000.

As shown, every $1,000 increment in Bitcoin's price does not translate to a proportionate amount of profits or losses denominated in BTC. In fact, each subsequent increment in the BTC/USD trading pair returns diminishing amounts of BTC. This phenomenon is often described as the non-linear nature of inverse futures contracts. 

Pros of USDT-Settled Futures

AUSDT-margined contract is a linear futures product that is quoted and settled in USDT – a stablecoin pegged to the value of the U.S. dollar. One of the key benefits of USDT settlement is that you can easily calculate their returns in fiat instead of BTC, which makes USDT-margined contracts more intuitive. 

For example, when you make 500 USDT in profit, you can easily estimate that the profit is worth approximately $500  since the value of 1 USDT is pegged closely to 1 USD. 

Additionally, a universal settlement currency such as USDT, provides more flexibility. You can use the same settlement currency across various futures contracts (i.e., BTC, ETH, XRP and etc), eliminating the need to buy the underlying coins to fund futures positions. As such, you will not incur excessive fees as there is no additional conversion required when trading with USDT.

In periods of high volatility, USDT-margined contracts can help reduce the risk of large price swings. So you do not need to worry about hedging their underlying collateral exposure. On several occasions, trading with USDT has been a prudent choice, especially in volatile periods.

Cons of USDT-Settled Futures

When trading with USDT-margined contracts, you must allocate a significant portion of your portfolio in USDT. This ensures that you hold enough collateral to fund positions in the futures market. Otherwise, you will be forced to sell your cryptocurrencies at a compromised price should you need to trade in the futures market. 

This strategy can be unfavorable for most cryptocurrency investors as stablecoins such as USDT do not appreciate in value and are not investment assets, unlike conventional cryptocurrencies. 100 USDT today is likely to be worth $100 in two years.

For many investors, the ability to trade Bitcoin and other cryptocurrencies against fiat currencies without the need to interact with fiat itself can be beneficial. From the exchanges’ perspective, excessive regulation can be avoided by eliminating fiat altogether. 

Final Thoughts

Now that you know the difference between COIN-margined and USDT-margined contracts and their nuances, the question is, how can we use them to maximize returns?

Ideally, in a bull market, long positions with COIN-margined contracts can maximize profits. Conversely, as the market turns bearish, using USDT-margined contracts to go short is a safer option to preserve your gains.

In short, COIN-margined contracts are more suited for hedging purposes. These products enable miners and long-term investors to hedge the value of their crypto holdings in terms of USD via short positions. 

On the other hand, USDT-margined contracts are simpler to operate and do not need to hedge the margin risk like COIN-margined contracts.

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