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3 factors to consider before trading perpetual crypto futures contracts

November 9, 2020

As tempting as it is to buy altcoins with an everlasting future, there are some hidden pitfalls that you should look carefully.

In the past few years, Numerous exchanges offer futures for altcoins, which are traded on tether (USDT) and stablecoin pairsn that have become the standard over time. However, this change is more convenient for most traders poses some serious problems for those willing to keep long positions open for more than a few weeks.

Before opening a trade on an exchange that offers perpetual futuresTraders should be aware that stronger wicks can lead to stop loss effects, investors are no longer able to use their altcoins for lucrative returns, and that the variable financing rate can significantly increase the cost of executing a trade . .

3 factors to consider before trading perpetual crypto futures contracts
3 factors to consider before trading perpetual crypto futures contracts

According to Coinmarketcap, Bitcoin’s market cap is currently $ 283,675,287,208.

Leverage leads to stronger wicks

Regardless of how liquid a market is, Leverage will lead to stronger highlights. Although these movements do not usually result in a forced liquidation, can make investors stop.

So, The possibility of faulty wicks is the main reason traders should avoid holding futures positions for extended periods of time.

Futures settlement machines use a price index that consists of several (regular) cash exchanges to avoid price manipulation. Therefore, the system does not close positions with insufficient margin until the index has reached its upper limits.

Ether Perpetual Futures on Coinbase and Binance. Source: trade view

It is remarkable how ETH had a low of $ 326 on Coinbase while at the same time the Binance futures had a low of $ 302. This change may seem small, however This certainly triggered stop orders from traders.

Is there a way Avoid these problems easy Set stop orders at the mark price (index) instead of the last price.

Selection of the activation price of the BTC futures contract. Source: Binance

This simple change avoids liquidation if the futures contracts are monetarily decoupled from their index. The big problem is that Not all exchanges offer this option.

Staking and liquidity mining can offer better returns

Buying altcoins through the use of futures does not allow them to be used for staking or borrowing. For investors willing to hold a long-term position, this is another factor to consider.

There are numerous platforms that offer staking and loan services, including the major central exchanges. Some of the altcoins that offer an annual percentage rate of return (APY) per 30 day contract that can range from 7% to 18% are Polkadot (DOT), Tron (TRX), Cosmos (ATOM), and Cardano (ADA).

Decentralized Mining Pools (DeFi) are another way to generate income by holding altcoins. Users must Be wary of the risks associated with this sectorThis is especially true for pools with non-parity loss that occurs between two different cryptos.

DeFi delivers current returns. Source: CoinMarketCap

So, If you choose an indefinite future, you will not be able to participate in stakeout or crop farming. It may not affect the decision of those who bet on short-term price fluctuations, but it weighs more as the weeks go by.

Watch out for fluctuations in funding rates

Perpetual contracts, also known as reverse trades, have a fee that is usually billed every eight hours. The funding rates ensure that the exchange rate risk is not unbalanced. Although the open interest of buyers and sellers is balanced at all times, leverage can vary.

When buyers (of long positions) demand the greatest leverage, the funding rate becomes positive. So these buyers pay the fees. This question is especially true during times of bullish rallies, when more long positions are typically in demand.

ETH / USD perpetual contract finance rate on BitMEX. Source: Digital asset data

The graph above shows the bullish rally in late July, and it can be clearly seen While Ether (ETH) rose from $ 230 to $ 380, the perpetual funding rate rose too. After an average of three weeks 1.8% This had a negative effect on the result of the buyers.

Once again, It may not be detrimental to those in short-term positions, but it adds up over the months.

To avoid this shortcoming, one could opt for margin trading instead of futures contracts.. Loans usually cost between 0.5 and 1.4% per month, while the maximum leverage is between 3 and 10 times.

As with eternal futures Investors must also deposit a margin to gain access to these markets.

It should be noted that some exchanges allow users to manually select interest rates and set loan periods. This method is much better as it avoids the surprises that naturally come with large shopping activities.

While trading perpetual futures is a great tool, it has its shortcomings. These include stronger wicks with stop-loss conditions, the inability to bet and the variable funding rate.

The views, thoughts and opinions expressed here are solely those of darer and do not necessarily reflect or represent the views and opinions of Cointelegraph. Every investment and trade movement is associated with risks. You must do your own research when making a decision.

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