Binance Futures - Perpetual Futures vs Quarterly Futures

Binance Futures: Perpetual Futures vs Quarterly Futures

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Futures contracts were initially created for commodities to avoid future risks by fixing prices ahead of time and settling the deal at a predetermined date. The method was adopted by other assets and has reached the cryptocurrency space when Chicago-based CME and Cboe exchanges launched Bitcoin futures in 2017. During the last few years, many traditional cryptocurrency exchanges have introduced futures contracts as well. Binance launched its futures trading platform at the end of 2019. Now it’s one of the most reputable services, ranking fourth by Bitcoin futures trading volume, according to Coingecko data.

Cryptocurrency futures allow traders to speculate on the price of Bitcoin and altcoins without owning them. The chances for profit are higher when using the leverage, though you should consider the greater risk as well.

As explained in a previous article the basics of crypto futures and how you can set up an account with Binance Futures. Now I’d like to discuss the two types of cryptocurrency futures offered by Binance – perpetual futures and quarterly futures.

Perpetual Futures  

Unlike traditional futures, perpetual contracts don’t have expiry dates, so there is no settlement. As a result, the price of a perpetual contract is much closer to the spot price of the underlying asset. The main mechanism used to maintain the perpetual contracts’ price close to the spot price is funding, which we’ll explain below.

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Given that perpetual futures don’t have an expiry time, traders can hold a position for as long as they wish, as the contracts are rolled over every eight hours.

Before trading this type of contracts, you should be aware of the following components:

  • Position Marking – perpetual contracts are marked based on the so-called Fair Price Marking method. The Unrealized PnL and liquidation prices directly depend on the Mark Price.
  • Initial Margin and Maintenance Margin – futures trading operates with leverage, so you should monitor these two key margin levels to avoid liquidation.
  • Funding – regular payments are exchanged between buyers and sellers every 8 hours. If the rate is positive, then longs have to pay while shorts receive the rate. If the rate is negative, shorts pay longs. Binance updates the rate every 8 hours. If you have an open position, you’ll have to pay or receive funding only if you hold it at the Funding Timestamp.
  • Funding Timestamps – Binance updates the rate at 00:00, 08:00, and 16:00 UTC.

Initial and Maintenance Margin

The initial margin is the minimum amount you have to spend to open a leveraged position since you cannot enter the market with 100% borrowed capital. For example, you can buy 10 Bitcoin with an initial margin of 1 Bitcoin, which is your own contribution. In this case, the leverage is 10x. Thus, your initial margin is 10% of the total order. The initial margin acts as collateral and backs your position.

Once the position is open, you should track the fluctuating maintenance margin, which is the minimum amount of collateral you must keep to maintain the position open. If the maintenance figure drops below this level, you will either receive a margin call or your position will get liquidated. A margin call is when the broker or platform operator is warning you that you should add more funds to keep the position open. However, most cryptocurrency exchanges, including Binance, would rather liquidate the position. Nevertheless, you don’t need the margin call feature at all if you regularly monitor the maintenance margin and add funds manually whenever your collateral is consumed as the price goes against you.

Otherwise, you will face liquidation. This is when the value of collateral drops below the maintenance margin. On Binance, liquidations occur based on the risk and leverage of traders. As a rule, the larger the total position, the higher the required margin.

It’s important to mention that Binance charges additional fees for liquidations. You can avoid that by closing your positions manually before the liquidation price is reached. Alternatively, you can add more funds as collateral to maintain the position open.

What is the Funding Rate?

As mentioned, funding occurs every eight hours. The process consists of regular payments between buyers and sellers based on the funding rate. When this rate is positive, traders that have long positions have to pay those who opened short positions. Otherwise, when the rate is negative, short positions have to pay longs. Note that you will pay or receive payment only if you keep your positions open during the timestamps.

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The funding rate is calculated based on two elements: the interest rate and the premium/discount. On Binance, there is a fixed interest rate of 0.03%, and the premium fluctuates based on the price difference between the perpetual contract and the spot price. When a perpetual contract is trading on a premium, i.e. higher than the spot markets, long positions have to pay shorts as the funding rate is positive. This mechanism tries to drive the price of the perpetual contract down as longs will seek to close their positions while new shorts will be opened.

These payments are carried out peer-to-peer and Binance charges no fees for funding rate transfers.

What is the Mark Price?

The mark price is very important because it avoids unfair liquidations, especially when the market is volatile. The mark price is an estimate of the fair price of a perpetual contract when compared to its actual trading price (also called last price).

On Binance, the mark price takes into account the Index Price of the underlying asset (based on the spot price) and the funding rate. The mark is important also because it drives the so-called unrealized PnL. You can monitor the mark price right above the chart.

Binance Futures: Mark Price in Perpetual Futures
Source: Binance.com – Binance Futures: Mark Price in Perpetual Futures

PnL is the abbreviation of profit and loss, and it can be either realized or unrealized. When your positions are open, the PnL is unrealized, and it is fluctuating as the price changes. When you close your positions, the unrealized PnL turns into realized PnL. The unrealized PnL uses the mark price as reference.

Quarterly Futures

In June 2020, Binance launched a new contract type called quarterly futures. This investment product behaves exactly like a standard futures contract – it has an expiry date when it’s settled. On Binance, quarterly futures are delivered and settled in cash (USD). This means that that the underlying asset, in this case Bitcoin, is delivered in the form of US dollars. However, in order to open a position, you should spend real Bitcoin for the margin requirement.

Binance’s quarterly futures contract expires on the last Friday of every quarter. For instance, the current contract – BTCUSD 0925 – will expire on September 25, 2020, because it is the last Friday of the third quarter. On that date, those who have positions will receive the cash equivalent.

Binance explained in its announcement:

Quarterly Futures is our first derivative contract with a set expiration and settlement date. Market data aggregator CryptoCompare found that the crypto derivatives monthly volume increased by one-third to hit a new all-time high of $602 billion in May. Binance Quarterly Futures will meet this rise in demand and complement our existing product line to offer users greater variety and diversification.”

Source: Binance.com – Binance Launches Quarterly Futures

The price index for quarterly futures tracks the BTC/USD market. The index price consists of a moving average of the BTC/USD price on five exchanges – Bitstamp, Bittrex, Kraken, Coinbase Pro, and Binance. All five markets are equally weighted. The index is used to determine the mark price.

There is a delivery fee of 0.015% in the case when you keep your position open upon expiry. Note that you won’t be able to open a position 10 minutes before the expiry.

Perpetual and Quarterly Contracts – Similarities and Differences

On Binance Futures, both types of contracts allow margin trading with up to 125x leverage. The leverage can be changed manually to reflect your risk profile. Note that the high leverage would increase the chances of liquidation when the price moves against you. Also, you should know that the higher the leverage you set, the smaller is the maximum position size you are allowed to open.

Here are the main differences between the two contract types:

  • Binance offers a single quarterly futures contract – BTC/USD. It said it could add more futures with fixed expiry dates to allow traders to open monthly or even weekly positions. Elsewhere, the futures platform provides perpetual contracts on dozens of cryptocurrencies. However, all of them, including the Bitcoin-denominated contract, are traded against the USDT rather than the USD.
  •  If you trade the quarterly contract, you have to spend Bitcoin as collateral. With perpetual contracts, you can deposit USDT, BNB, or BTC.
  • The tick size on quarterly futures is $0.10, i.e. the price changes occur in increments of $0.10. Elsewhere, the tick size of perpetual futures is only $0.01.
  • The quarterly contract has a fixed expiry date, which is the last Friday of every quarter. Perpetual contracts have no settlement and expiry date.

Binance Futures June Report

On July 9, 2020, Binance Futures presented its monthly trading report for June, the month when it launched the quarterly contract.

Besides this, Binance Futures added 6 new perpetual contracts, taking its total number of offerings to 31. You can trade the following cryptocurrencies – BTC, ETH, EOS, NEO, DASH, THETA, KNC, ZRX, QTUM, COMP, ATOM, IOTA, ADA, OMG, BCH, XTZ, BNB, IOST, ETC, XMR, LTC, ZEC, XRP, ONT, BAT, VET, ALGO, DOGE, TRX, ZIL, and XLM.

The new additions are ALGO/USD, ZIL/USDT, KNC/USDT, ZRX/USDT, COMP/USDT, and OMG/USDT.

In terms of performance, the exchange found out that the Bitcoin’s 30-day volatility dropped to the lowest level since October 2019.

Binance Futures: Bitcoin’s Thirty-day Rolling Volatility
Source: Binance.com – Binance Futures: Bitcoin’s Thirty-day Rolling Volatility

Indeed, the oldest cryptocurrency, now trading at around $9,250, has been fluctuating mostly between $9,000 and $10,000 since the beginning of May. Bitcoin’s price action has become unbearable for many traders, as they look to speculate on the short-term price changes. Before the third halving of May 11, Bitcoin rallied by adding over 150% in just two months, recovering the losses incurred during a shocking collapse from mid-March caused by the coronavirus crisis. Since the price recovery, Bitcoin hasn’t managed to consolidate above $10,000 and still targeting that level in the longer-term. Nevertheless, some analysts claim that the quiet market is in wait-and-see mode before a big move, potentially a bullish one.

Bitcoin’s 30-day volatility started to point downwards on June 5, dropping by over 80% since April. As the chart shows, the sharp declines in volatility – to 30% or lower – are preceded by big moves, either bullish or bearish.

Another key finding is that the open interest on Binance Futures continued to increase for the fourth consecutive month in June, from 500 million to 580 million USDT, reflecting 16% month-on-month growth. In the second quarter, open interest has increased by over 160% from 200 million USDT in March. This means that more traders are interested in keeping their position open for longer periods, probably anticipating the next big move.

Despite Bitcoin’s passivity, Binance noticed that several altcoins, including ADA, LINK, BAT, VET, and IOST, generated positive returns and might even trigger the so-called altcoin season.

This happened as Bitcoin delivered negative returns, ending June down over 3%. Also, major altcoins, including BCH, ETH, and EOS, declined by 6.9%, 2.6%, and 11.5% on the month, respectively.

However, mid and small-cap tokens did well. For example, VET surged by more than 40% in June.

Binance Futures: Monthly Returns of Perpetual Contracts
Source: Binance.com – Binance Futures: Monthly Returns of Perpetual Contracts

In June, trading volume on Binance Futures dropped by 36% compared to May, with $87.6 billion traded across perpetual contracts. The daily average volume was $2.9 billion, which is 34% lower than the average daily volume in the previous month.

Binance Futures: Average 24-hour Volumes in June
Source: Binance.com – Binance Futures: Average 24-hour Volumes in June

The drop in trading volume reflects the lower interest in BTC contracts, which averaged 73.3% of the total trading volume in June, down from 82.1% in May. Instead, demand for altcoins grew, as the volume percentage across altcoin perpetual contracts was 26.7% versus 17.9% in May.

Still, Bitcoin perpetual contracts were the most invested contract, accounting for 67% of the total open interest.

Binance concluded that while Bitcoin had been unusually quiet in June, the altcoin market has experienced a fantastic boost. They have attracted investors’ interest in the last few weeks, moving it away from Bitcoin. The question is: will Bitcoin breakout soon above $10,000 or below $8,000? The report authors added:

From earlier observation, historical patterns suggest that volatility contraction often precedes expansion, which eventually leads to a breakout or breakdown. Furthermore, the reduced volatility could be associated with increased HODLing as traders do not feel incentivized to sell their Bitcoins. We also observed open interest growth in June, which may suggest that traders are positioned for a big move.”

Source: Binance.com – June Trading Report: What’s Next for Boring Bitcoin?

The Final Note

Binance is a rapidly expanding ecosystem, allowing users to trade various derivatives to get better exposure to cryptocurrencies. Obviously, the exchange is keen to add new products on a regular basis to meet demand from clients.

Besides the perpetual and quarterly contracts, Binance offers so-called leveraged tokens. Four tokens are listed on the platform – ETHDOWN, ETHUP, BTCDOWN, and BTCUP.

A leveraged token is a financial derivative that enables you to gain exposure to a leveraged trading position in a digital asset without having to deal with margin trade, liquidation, collateral, funding rates. Due to its simplicity, they have got a lot of attention since their appearance.

As Binance explains:

Binance Leveraged Tokens are tradable assets in the Binance spot market that give you leveraged exposure to the underlying asset. Each leveraged token represents a basket of perpetual contract positions. The price of the tokens tracks the change in notional amount of the perpetual contract positions in the basket and changes in the multiples of leverage level.”

Source: Binance.com – Binance Leveraged Tokens

Unlike leveraged trading, you can open leverage positions without the need of having any collaterals, monitoring margin maintenance, and fearing liquidation risk.

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