USDT-settled futures contracts are gaining popularity, here’s why
When BitMEX launched the Bitcoin Perpetual Futures (BTC) market in 2016, it created a new paradigm for cryptocurrency operators. While it was not the first platform to offer reverse swaps settled on the BTC, BitMEX offered ease of use and liquidity to a wider audience of investors.
BitMEX contracts did not include fiat or stablecoin, and although the reference price was calculated in U.S. dollars, all gains and losses were paid out in BTC.
USDT-settled contracts will become increasingly important through 2021. While the use of USDT-based contracts makes it easier for retail investors to calculate gains, losses and margin requirements, it also has drawbacks.
Why BTC contracts are for more experienced traders.
The future of perpetual coins in finance. Source: Binance
Binance offers currency contracts (with payment from BTC). In this case, the buyer (long position) and the seller (short position) must deposit the BTC as a margin amount instead of relying on a margin in USD.
When negotiating contracts for parts, there is no need to use standards. Thus, it has less collateral risk (margin). Algorithm-based stable coins have stabilization problems, while fiat-based coins have seizure risk and are under government supervision. Therefore, a trader can avoid these risks by depositing and repurchasing only BTCs.
The disadvantage is that every time the price of BTC falls, the guarantee in US dollars also falls. This effect occurs because the contracts are issued in US dollars. When a futures position is opened, the quantity is always expressed in number of contracts, i.e. 1 contract = 1 USD on Bitmex and Deribit, or 1 contract = 100 USD on Binance, Huobi and OKEx.
This effect is known as the nonlinear inverse future return, and the buyer suffers more loss when the BTC price falls. The greater the difference, the further the underlying price moves away from the original position.
US dollar contracts are riskier but easier to manage.
Futures contracts settled in USDT are easier to manage because the returns are linear and do not depend on sharp movements in the BTC price. Those who want to take short positions in futures do not always have to buy BTC, but there are costs associated with holding open positions.
This policy does not require active coverage to protect the guarantee (margin), and thus is the best choice for small merchants.
It should be noted that long-term positions in stable currencies carry an inherent risk, which increases when third-party custodians are used. This is one reason why gamblers can receive more than 11% APY on deposits in stable currencies.
Whether an investor measures returns in BTC or in orders also plays an important role in this decision. Arbitrage committees and market-makers tend to favor contracts settled in US dollars because their alternative is herd trading or low-risk trading.
Retail investors investing in cryptocurrencies, on the other hand, typically hold BTCs or turn to alternative currencies in search of higher returns than fixed APYs. As a preferred instrument for professional traders, futures settled in USDT are therefore gaining popularity.
The views and opinions expressed in this document are solely those of the author and do not necessarily reflect the views of Cointelegraph. There are risks associated with all investments and business transactions. You should do your own research when making decisions.
Frequently asked questions
Is Usdt 2020 safe?
In terms of technology, USDT is completely secure – it is a centralized token developed on the Ethereum decentralized blockchain and must be guaranteed by $1 on Tether Ltd’s balance sheet in the form of cash in bank accounts and government bonds.
Is the United States losing value?
Most forecasts indicate that the USDT will generate good returns within 3 to 5 years, making it a solid long-term investment. If you are looking for a stable asset to store value in, this is one of the best in the cryptocurrency market.
What is the importance of the Uspdt?
Tether is specifically designed to provide the necessary bridge between cash and cryptocurrency, offering users stability, transparency and minimal transaction costs. It is indexed to the U.S. dollar and has a value ratio of 1:1 to the U.S. dollar.