Binance

Futures contracts settled in USDT are becoming popular

Futures contracts settled in USDT are becoming increasingly popular: we know the reasons

Crypto exchanges offer perpetual futures settled in USDT and BTC. But which option is best for the average trader?

When BitMEX launched its Bitcoin (BTC) Perpetual Futures in 2016, the exchange created a new concept for cryptocurrency traders. Although it was not the first Bitcoin Code platform to offer inverse swaps settled in BTC, BitMEX offered ease of use and liquidity to a wider audience of investors.

BitMEX contracts did not include fiat or stablecoins, and although the reference rate was calculated in USD, all profits and losses were paid out in BTC.

In 2021, contracts settled with Tether (USDT) gained relevance. Using USDT-based contracts certainly makes it easier for retail investors to calculate their profit, loss and required margin. But there are also disadvantages.

BTC settled contracts only something for more experienced traders

Binance offers Coin-Margines (contracts settled in BTC). In this case, the buyer (long) and the seller (short) have to deposit BTC as margins instead of USDT.

When trading coin-margined contracts, stablecoins do not have to be used. Therefore, there is less collateral (margin) risk. Algorithmic stablecoins have stabilisation issues, while fiat-backed stablecoins face seizures and government controls. Therefore, a trader can avoid these risks by depositing and redeeming only BTC.

The downside to this is that whenever the BTC rate goes down, so does the collateral in USD. This happens because the contracts are denominated in USD. When a futures position is opened, the quantity is always the contract quantity, either 1 contract = 1 USD on Bitmex and Deribit, or 1 contract = 100 USD on Binance, Huobi and OKEx.

This effect is known as non-linear inverse future return and the buyer suffers more losses when the BTC price collapses. The difference gets bigger the further the reference price moves down from the starting position.

Contracts settled in USDT riskier but easier to manage

Futures contracts settled in USDT are easier to manage because the returns are linear and are not affected by sharp BTC price movements. Those who want to open short positions in the futures contracts do not have to buy BTC at any point, but there are costs to hold open positions.

This contract does not require active hedging to protect the exposure with collateral (margin), so it is a better choice for private traders.

Holding long-term positions on stablecoins has an embedded risk that increases when third-party custody services are used. That’s why stakers can get over 11 per cent return per year on stablecoin deposits.

Whether an investor measures returns in BTC or fiat also plays an important role in this decision. Arbitrage trading venues and market makers tend to prefer contracts settled in USDT, as they can alternatively only do staking or low-risk cash-and-carry trades.

On the other hand, private traders in cryptocurrencies usually hold BTC or switch to altcoins. The aim here is to achieve higher returns rather than a fixed return per year. As they are the preferred instrument of professional traders, USDT-settled futures are gaining traction.