Here’s why Tether settled futures contracts are gaining popularity


When BitMEX launched its Bitcoin (BTC) perpetual futures (reverse swaps) market in 2016, it created a new paradigm for cryptocurrency traders. Although this was not the first platform to offer BTC-settled reverse swaps, BitMEX brought usability and liquidity to a wider audience of investors.

BitMEX contracts did not involve fiat currencies or stablecoins and, although the reference price was calculated in USD, all gains and losses were paid in BTC.

Fast-forward to 2021, and contracts settled in Tether (USDT) have gained relevance. Using USDT-based contracts certainly makes it easier for retail investors to calculate their profit, loss, and required margin, but they also have their downsides.

Why BTC settled contracts are for more experienced traders

Binance Coin Margin Perpetual Futures. Source: Binance

Binance offers currency margin contracts (settled in BTC) and in this case, instead of relying on USDT margin, the buyer (long position) and seller (short position) must deposit BTC as margin.

When trading currency margin contracts, there is no need to use stablecoins. Therefore, you have less collateral risk (margin). Algorithm-backed stablecoins have stabilization issues, while fiat-backed stablecoins run risks of seizures and government controls. Therefore, by depositing and redeeming BTC exclusively, a trader can avoid these risks.

On the downside, whenever the price of BTC goes down, so does the collateral in USD terms. This impact occurs because the contracts are priced in USD. Whenever a futures position is opened, the amount is always the same as the contract, whether it is 1 contract = $ 1 on Bitmex and Deribit, or 1 contract = $ 100 on Binance, Huobi and OKEx.

This effect is known as inverse futures non-linear returns and the buyer incurs further losses when the price of BTC plummets. The difference increases the more the reference price falls from the moment the position was opened.

USDT settled contracts are riskier but easier to handle

Futures contracts settled in USDT are easier to manage because the returns are linear and unaffected by large swings in the price of BTC. For those who are willing to short the futures contracts, there is no need to buy BTC at any time, but there are costs involved to keep the positions open.

This contract does not need an active hedge to protect the collateral exposure (margin), therefore it is a better option for retail traders.

It is worth noting that Holding long-term positions in any stablecoins carries an implicit risk, which increases when using third-party custodial services. This is one of the reasons why bettors can earn more than an annual percentage return (APY) of 11% on stablecoin deposits.

Whether an investor measures his earnings in BTC or fiat money also plays an important role in this decision. Trading desks and market makers tend to prefer contracts settled in USDT, as their alternative investment is staking, carry trades, or low-risk spot trading.

On the other hand, Cryptocurrency retail investors generally hold BTC or trade it to altcoins with the goal of earning higher returns than a fixed APY. Therefore, being the preferred instrument of professional traders, futures settled in USDT are gaining popularity.

The views and opinions expressed here are solely those of the carr and do not necessarily reflect the views of Cointelegraph. Every investment and business move involves risks, you must do your own research when making a decision.

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