Binance Futures Contracts (USDT-Margin, Leveraged, Vanilla)

Binance Futures Contracts (USDT-Margin, Leveraged, Vanilla)

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Binance currently runs the largest derivatives platform in the world in terms of trading volume. In only three years, the futures platform has managed to become the unmatched leader, with approximately $40 billion in 24-hour trading volume as of today. In February alone, Binance Futures contracts handled more than $1.3 trillion in volume and hit a new daily volume record of more than $108 billion on February 23.

Binance Futures Contracts - Daily Volume in Billion USD
Source: Binance – Daily Volume in Billion USD

The derivatives platform has benefited from the continuation of the Bitcoin rally and the DeFi craze. Binance has managed to attract users thanks to a wide range of top-notch tradable instruments. In the present article, we’ll discuss the four main Binance Futures contracts offered by Binance: USDT-Margined Futures, COIN-M Futures, Leveraged Tokens, and Vanilla Options. Every category has its unique features and fits a certain trading style. We hope that this article will help you to learn more about how Binance Futures works and what instruments are suitable in your particular case.

That being said, here are the main types of crypto futures and other derivatives that you can trade on Binance as of mid-March 2021 (mentioning the date really makes sense, as the Binance ecosystem is expanding at a rapid pace):

USDⓈ-M Futures

Binance’s USDⓈ-M futures are denominated and settled in USDT, though most of them are perpetual contracts and have no settlement as such. In fact, this category follows on the very first futures instruments provided by Binance. You can call USDⓈ-M futures the flagship product of Binance’s derivatives platform. The USDⓈ-M futures include dozens of perpetual contracts and a couple of quarterly futures contracts.

As you may know, perpetual contracts don’t have expiry dates, and hence there is no settlement. The price of a perpetual contract tends to be very close to the spot price of the underlying cryptocurrency. Perpetual contracts rely on a special mechanism called funding, which are regular payments exchanged between futures buyers and sellers every 8 hours. If the interest rate of the funding mechanism is positive, then longs have to pay while shorts receive the rate. Conversely, if the rate is negative, shorts have to pay longs. The funding rate is updated every 8 hours. Thus, if you have an open position, you have to pay or receive funding only if your position is held at the Funding Timestamp, which is at 00:00, 08:00, and 16:00 UTC.

In this way, traders can hold their positions open for an unlimited period. As for the quarterly contracts in this group, they are also denominated in USDT, but they have a settlement period at the end of every quarter. The price of such an instrument may display a greater variation compared to the spot price.

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At the moment, there are about 100 USDT-denominated perpetual contracts, including BTCUSDT (you should look specifically for BTCUSDT Perpetual), ETHUSDT Perpetual, BCHUSDT, XRPUSDT, LTCUSDT, EOSUSDT, ADAUSDT, LINKUSDT, XLMUSDT, XRMUSDT, ETCUSDT, BATUSDT, ALGOUSDT, KNCUSDT, and KAVAUSDT, among others.

The great thing about these perpetual contracts is that they can give you exposure to the DeFi space, which is the fastest-growing sector in the crypto industry right now. Binance Futures contracts supports most of the major DeFi tokens. Note that the maximum leverage for this group of derivatives is 125x, which enables you to augment potential profits by a wide margin. However, make sure to implement proper risk management techniques when trading with high leverage, because you can easily deplete your balance.

Besides the mentioned perpetual contracts, there are four USDT-denominated quarterly contracts for Bitcoin and Ethereum, including BTCUSDT 0326, ETHUSDT 0326, BTCUSDT 0625, and ETHUSDT 0625. The former two expire on March 26, 2021, while the latter ones expire on June 25, 2021. The March contracts will be replaced after expiration. The maximum leverage for the USDT-denominated quarterly contracts is 75x.

Pros of USDT-Margined Contracts

The great thing about USDT-denominated futures provided by Binance is that the stablecoin used as the quote currency is pegged to the US dollar with a 1:1 ratio, which makes it easier to calculate profits and losses. Also, the fact that there is a wide range of futures margined in USDT is convenient, as you should hold a single underlying coin, which is USDT, to get exposure to multiple markets, including DeFi tokens.

Cons of USDT-Settled Futures

One of the drawbacks of USDT-margined contracts is that you have to allocate a great portion of your portfolio in USDT, as the system has to make sure you hold enough collateral to fund your positions. However, in the bullish market that we’re having at the beginning of 2021, this may be unfavorable, as USDT does not appreciate in value.

COIN-M Futures

The second major group of futures provided by Binance includes the so-called COIN-M futures, which are settled in cryptocurrency rather than in USDT. While the are perpetual, quarterly, and bi-quarterly COIN-M futures, all of them have the following characteristics:

  • They are settled in the underlying cryptocurrency. This eliminates the need to hold USDT as collateral.
  • There is a contract multiplier that represents the value of any given contract. For example, each BTC contract represents 100 USD. Thus, if you invest $1,000 in the BTCUSD Quarterly 0625, that means you buy 10 such contracts. With other cryptocurrencies, each contract represents 10 USD. Thus, if you invest $1,000 in ETHUSD Quarterly 0625, that means you buy 100 contracts.
  • Quarterly COIN-M futures have an expiration time identical to USDT-margined quarterly futures. COIN-M perpetual futures have no expiration time.

In fact, Binance launched its COIN-margined perpetual futures only at the end of 2020, so they are quite new. This type of derivatives derives its value from the underlying cryptocurrency and is a great way to get exposure to digital coins without actually owning them. Besides this, with perpetual contracts, you can trade any available cryptocurrency with leverage, which can magnify the potential profits.

All of Binance’s COIN-margined perpetual contracts are cryptocurrency-margined, meaning that the underlying coin is used as the base currency. Here is how it works: let’s say that you bought 100 Bitcoin-margined perpetual contracts (100*100 USD = $10,000 – so this is the value of your trade) at $50,000. When doing this, you are essentially selling $10,000 and buying the equivalent value of BTC (10,000/50,000 is 0.2BTC).

Let’s say that Bitcoin’s price rose to $60,000, and you want to take the profit and close the position. To do this, you are buying back $10,000 worth of contracts and at the same time selling the equivalent of BTC (10,000/60,000 = about 0.17 BTC). In this particular trade, your profit is about 0.03BTC. The COIN-margined contracts are calculated in the respective cryptocurrency.

As of mid-March, Binance provides 14 COIN-margined perpetual contracts, including BTCUSD (you should look specifically for BTCUSD Perpetual), ETHUSD, LINKUSD, BNBUSD, TRXUSD, DOTUSD, ADAUSD, EOSUSD, LTCUSD, BCHUSD, XRPUSD, ETCUSD, FILUSD, and DOGEUSD. As with USDT-margined perpetual contracts, the maximum leverage of COIN-margined perpetual contracts is 125x.

Besides this, this category includes over 20 quarterly contracts that give exposure to Bitcoin, Ethereum, Cardano’s ADA, LINK, Ripple’s XRP, and BNB – Binance’s native token, among others.

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Pros of COIN-Settled Futures

The great thing about COIN-margined contracts is that they are denominated and settled in their base currency. Thus, to open a position in BTCUSD Quarterly 0625, you should simply fund the initial margin in BTC rather than convert it to USDT.  

If you are a long-term investor, this might be the right instrument for you, especially during the rally that we have experienced for the last few months, when Bitcoin easily surged above the 2017 peak and exceeded the $60,000 level.

Also, COIN-margined futures are a great way to hedge crypto positions without converting any crypto holdings into USDT.

Cons of COIN-Settled Futures

The main problem of COIN-margined futures is that the base currency, such as Bitcoin or Ethereum, is highly volatile. To avoid major losses, you have to implement tighter risk management measures. Remember how Bitcoin collapsed more than 40% in a single day on March 12, 2020, or how it surged about 100% from the end of January 2021 to the end of February.

If you ask which of USDT-margined and COIN-settled futures is better, there is no definitive answer on that. As a rule, COIN-margined contracts are relevant in bull markets, as they can maximize your profits. Elsewhere, USDT-margined contracts make sense in bearish markets, and they are more convenient for retail traders.

Leveraged Tokens

Besides the wide range of futures contracts, Binance also provides leveraged tokens and vanilla options. Binance insists on calling its leveraged tokens Binance Leverage Tokens (BLVTs), because they are a bit different from conventional leverage token products. On Binance, every BLVT represents a tokenized version of leveraged futures positions. It is made up of multiple open positions on the perpetual futures market. Basically, by investing in an already leveraged instrument, you don’t risk being liquidated, as in the case of margin trading. 

BTCUP and BTCDOWN were the first pair of BLVTs. The former aims to generate leveraged profits when Bitcoin increases in value, while BTCDOWN aims to generate profits when the underlying cryptocurrency is declining. Unlike traditional leveraged tokens, which have fixed leverage, BLVTs have variable leverage that ranges between 1.25x and 4x. With this variable leverage approach, Binance aims to maximize potential profits when the price goes in the needed direction and minimize losses when the price goes against the trader. Thus, if you invest in BTCUP and Bitcoin gains 10%, your return may be between 15% and 30%, thanks to the built-in leverage.

At the moment, you cannot hold your BLVTs in your Binance wallet. Fortunately, you can either trade them on Binance’s spot market to exchange for USDT (based on BVLT’s Net Asset Value) or redeem for the value they represent. However, in the latter case, there is a small redemption fee you should consider.

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Note that you should never trade BLVTs and leveraged tokens in general in the long-term, as the so-called volatility drag will negatively impact your position. BLVTs should be used for short-term speculation and when market momentum is high. Basically, you should consider three main rules when trading BLVTs and leveraged tokens in general:

  1. Use BLVTs for short-term trades to avoid the negative impact of daily rebalancing.
  2. Invest in BLVTs during rallies or sharp declines. Leveraged tokens show the best performance during strong trends.
  3. Don’t count on BLVTs as your main trading instrument but use them for diversifying your portfolio.

Thanks to the variable leverage, the volatility drag of BLVTs is much smaller. For example, the most popular leverage tokens aim for constant leverage of 3x. However, holding such instruments long-term might gradually turn out unprofitable due to the volatility. For example, if BTC gains 5%, the conventional leveraged token should generate a 15% return. But here is how the constant leverage works:

  • Let’s say that both the underlying asset and its 3X leveraged token start at $100 each.
  • On Day 1, the underlying asset gains 5%. Thus, the 3x leveraged token gains 15%.
  • On Day 2, the underlying asset drops 5%. Similarly, the leveraged token declines by 15%.

Here is the resulting profit and loss of the asset and the leveraged tokens during this period:

Binance Futures Contracts - Profit and Loss of Underlying Asset and Leveraged Tokens
Source: Binance Futures Contracts – Profit and Loss of Underlying Asset and Leveraged Tokens

Even though the asset came in at almost the same price during the second day (T+2), the leveraged token lost about 2% of its initial value. If you hold your leveraged token positions open for months, they can lose more than 90% of their value due to the volatility drag alone.

Binance Futures Contracts - Profit and Loss of Underlying Asset and leveraged Tokens - Number of Trading Days
Source: Binance Futures Contracts – Profit and Loss of Underlying Asset and leveraged Tokens – Number of Trading Days

BLTVs are designed to address this issue, but they are not ideal as well, so make sure to use them for short-term trades. Currently, Binance offers UP and DOWN BLTVs for 19 cryptocurrencies, including BTC, ETH, LTC, ADA, LINK, BNB, TRX, AAVE, SUSHI, and UNI, among others. BLTVs are another great way to get exposure to the DeFi market.

Vanilla Options

At the end of 2020, Binance launched a new type of derivatives called Vanilla options or European-style options. These option contracts are settled in USDT and provide Binance users more choices to diversify their crypto portfolio. Users can both buy Vanilla options for trading purposes or sell options as issuers.

Binance initially trialed the new product in November 2020 and analyzed the feedback from the public to improve the user experience, including by introducing more risk control mechanisms.

For those unfamiliar, options represent a group of derivatives used in traditional finance to hedge against price fluctuations of the underlying asset. They are settled at a predetermined expiration date in the future. However, unlike futures, options give the holder the right without the obligation to exercise the contract.

Vanilla options can only be exercised by the holder at the expiration date. Binance first introduced American-style options in April 2020, and they can be exercised at any time up until the expiration time. Thus, Binance users can benefit from both styles of options.

During the launch of the European-style options, Binance CEO Changpeng Zhao (CZ) said that derivatives markets had played an important role in promoting cryptocurrency adoption and had contributed to the recent rally. He said:

The crypto industry’s growth is in good part attributable to a combination of factors, including wider public education and institutional interest, innovations in DeFi protocols and smart contracts, and development of a robust derivatives market. Binance will continue to play a leading role in creating useful products for the community.”

At the moment, all Vanilla options revolve around the BTC/USDT pair.

Binance Futures Contracts Conclusion

Binance is currently the largest cryptocurrency trading ecosystem, and its derivatives platform offers a wide range of instruments that enable users to get exposure to the underlying cryptocurrencies in many ways. For example, there are so many approaches to speculate on the price of Bitcoin alone that you may get confused at first. Every trading instrument fits a particular style and profile, and you can definitely find what is suitable for you. Thanks to Binance, it is a great time to be a cryptocurrency trader.

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