Binance is one of the largest and most popular cryptocurrency exchanges in the world, offering a wide range of trading options, including spot trading, futures trading, and more. For traders looking to venture into the world of cryptocurrency derivatives, Binance Futures provides various instruments, including perpetual contracts. Understanding how these contracts work, and knowing the difference between USD-margined and coin-margined futures, is crucial for successful trading. In this tutorial, we'll cover everything you need to know about perpetual contracts, and explore the difference between USD-margined and coin-margined contracts.
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What is a Perpetual Contract?
A perpetual contract is a type of futures contract that doesn't have an expiration date, unlike traditional futures contracts. This makes it a popular choice for traders looking to take long or short positions without the concern of the contract expiring and needing to be rolled over. Perpetual contracts allow traders to speculate on the price movement of cryptocurrencies, just like other futures contracts, but with the advantage of ongoing exposure.
Perpetual contracts are typically used for trading Bitcoin (BTC), Ethereum (ETH), and other major altcoins, and are traded on margin, meaning you can trade with leverage. This adds the potential for both increased gains and increased risks, so understanding how perpetual contracts work and managing your risk is essential for traders.
Key Features of Perpetual Contracts:
No Expiration Date: Unlike traditional futures contracts, perpetual contracts have no fixed expiration date. Traders can hold positions indefinitely as long as they maintain the margin requirements.
Leverage: Binance allows users to trade perpetual contracts with leverage, meaning you can control a larger position with a smaller initial investment.
Funding Rate: A funding mechanism is used to ensure the price of the perpetual contract stays close to the underlying spot price. Depending on market conditions, traders may need to pay or receive funding every 8 hours.
Binance Futures: USD-Margined vs Coin-Margined Contracts
Binance Futures offers two types of perpetual contracts: USD-margined contracts (U-Margined) and Coin-margined contracts (Coin-Margined). Both types of contracts allow traders to trade using leverage, but they differ in the way margin is calculated and settled.
1. USD-Margined Futures (U-Margined)
The USD-margined futures contracts (also called U-Margined) are settled in USDT (Tether) or other stablecoins. The margin required to open a position is quoted and calculated in USDT or the stablecoin used for the contract. This means that traders don't need to hold the base cryptocurrency (like BTC or ETH) in their account. Instead, the trading pair is always quoted in USD, and profits or losses are settled in USDT.
How USD-Margined Futures Work:
Base Currency: The contract price is quoted in USDT, and you are trading the price of the cryptocurrency in USD terms.
Leverage: Leverage in U-margined contracts can range from 1x to 125x, depending on the specific contract and the trader’s account verification level.
Funding Rate: Just like with other perpetual contracts, USD-margined contracts involve a funding rate. This rate is calculated every 8 hours and is designed to keep the price of the futures contract close to the price of the underlying asset in the spot market.
Margin and Collateral: You are required to have USDT or the equivalent stablecoin in your wallet to act as collateral for your position. The profit or loss is also in USDT.
Example of Trading USD-Margined Contracts:
Suppose you want to trade a Bitcoin USD-margined perpetual contract. You decide to open a position with 10x leverage. If the price of Bitcoin goes up by 5%, your profit would be magnified by the leverage. For example, if the price moves from $30,000 to $31,500, with 10x leverage, you would earn 50% of your original investment, since leverage amplifies the effect of price movement.
2. Coin-Margined Futures (Coin-Margined)
On the other hand, coin-margined futures (also known as coin-margined contracts) are settled and margin is provided in the base cryptocurrency (such as Bitcoin or Ethereum). With coin-margined contracts, the margin you use to open a position is denominated in the cryptocurrency itself, not in USD or stablecoins.
How Coin-Margined Futures Work:
Base Currency: The contract price is quoted in the base cryptocurrency (e.g., BTC or ETH). Your profits or losses are also calculated and paid out in the same cryptocurrency.
Leverage: Leverage in coin-margined contracts also ranges from 1x to 125x, depending on the contract type.
Funding Rate: The funding rate is calculated and applied in the same way as USD-margined contracts, but the rate will be paid or received in the cryptocurrency used to settle the contract (e.g., BTC).
Margin and Collateral: To trade coin-margined contracts, you need to hold the base cryptocurrency (e.g., BTC) in your account to use it as collateral for opening positions.
Example of Trading Coin-Margined Contracts:
If you are trading a BTC/USDT coin-margined perpetual contract and use Bitcoin as collateral, any profit or loss you make will be in BTC. If you take a long position and the price of Bitcoin rises, you will profit in BTC. This is different from the USD-margined contract, where the profits are paid out in USDT.
Key Differences Between USD-Margined and Coin-Margined Futures:
Settlement Currency:
USD-Margined: Settled in stablecoins like USDT or BUSD.
Coin-Margined: Settled in the base cryptocurrency (e.g., BTC, ETH).
Collateral Currency:
USD-Margined: Margin is in USDT or stablecoins.
Coin-Margined: Margin is in the base cryptocurrency (e.g., BTC or ETH).
Risk Exposure:
USD-Margined: Risk exposure is tied to the price of the cryptocurrency in terms of USD. This makes it more accessible to traders who want to avoid holding volatile cryptocurrencies.
Coin-Margined: Risk exposure is tied to the price of the base cryptocurrency, which may increase the volatility for traders.
Funding Rates:
Both types of contracts have funding rates that occur every 8 hours. However, the payments are made in different currencies depending on the type of contract.
Liquidity:
USD-margined contracts tend to have higher liquidity because stablecoins are widely used and accepted. Coin-margined contracts may experience higher volatility due to their dependence on the price of the underlying cryptocurrency.
How to Trade Perpetual Contracts on Binance
Step 1: Create a Binance Account
If you don’t already have a Binance account, you’ll need to create one. Visit the Binance website, sign up, and complete the necessary verification steps.
Step 2: Fund Your Account
Deposit funds into your Binance account. You can deposit USDT or other stablecoins for USD-margined contracts, or you can deposit BTC, ETH, or other cryptocurrencies for coin-margined contracts.
Step 3: Choose Futures
After logging into your Binance account, go to the Futures section of the platform. Here, you can choose either USD-margined or coin-margined contracts, depending on your preference.
Step 4: Choose a Contract and Set Leverage
Select a cryptocurrency pair and decide on the leverage you want to use. You can adjust the leverage according to your risk tolerance and trading strategy.
Step 5: Open a Position
You can open a long or short position based on whether you believe the price of the cryptocurrency will rise or fall. Use limit or market orders to execute your trades.
Step 6: Monitor Your Position
Keep an eye on the price movement and funding rates. Be prepared to close your position manually or let it run until you reach your target profit or stop-loss.
Step 7: Closing the Position
Once you're ready to close your position, simply use the "Close Position" button. Binance will automatically calculate your profit or loss based on the price change, funding rates, and your leverage.
Conclusion
Binance offers a robust and feature-rich platform for trading perpetual contracts, including both USD-margined and coin-margined contracts. While both types of contracts offer leverage and trading flexibility, it’s important to understand the nuances of each, including the settlement currency, margin requirements, and associated risks. Whether you're a beginner or an experienced trader, thoroughly understanding the differences between USD-margined and coin-margined contracts, and how they work, is key to success in the world of cryptocurrency futures trading.
Always remember to use risk management strategies, such as stop losses, and to trade responsibly with leverage, as it can significantly amplify both gains and losses.
