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3 factors to consider before trading crypto perpetual futures contracts

3 factors to consider before trading crypto perpetual futures contracts

As tempting as it may be to purchase altcoins utilizing perpetual futures, there are just a few hidden traps that one ought to monitor intently. 

Over the previous few years, quite a few exchanges started to supply altcoin futures quoted in Tether (USDT) and stablecoin pairs, which finally grew to become the usual. This variation is extra handy for many merchants however nonetheless presents some critical points for these prepared to maintain lengthy positions open for greater than a few weeks.

Earlier than opening any commerce at an trade providing perpetual futures, merchants ought to be conscious that stronger wicks can run cease losses, buyers lose the flexibility to stake their altcoins for profitable yields, and the variable funding charge can considerably enhance the prices of carrying a commerce.

Leverage results in stronger wicks

No matter how liquid a market is, leverage will lead to stronger wicks. Despite the fact that these strikes often do not result in pressured liquidation, it would run an buyers’ stops.

Subsequently, the potential for errant wicks are the primary cause merchants ought to keep away from carrying futures positions for extra prolonged durations.

Futures liquidation engines use a worth index composed of a number of spot (common) exchanges to keep away from worth manipulation. Thus, the system will solely shut positions with inadequate margin as soon as an index reaches its stops.

Ether Coinbase and Binance perpetual futures. Supply: Tradingview

Take discover how ETH had a $326 low on Coinbase, whereas concurrently Binance futures confronted a $302 low. This variation might sound small, however this definitely triggered merchants’ cease orders.

There is a method to keep away from such points, just by setting one’s cease orders set off to Mark Worth (Index) as an alternative of Final Worth.

BTC futures contract set off worth choice. Supply: Binance

Making this straightforward change will keep away from getting liquidated if futures contracts monetarily decouple from its index. The massive problem is that not each trade provides this risk.

Staking and liquidity mining might supply a greater yield

Shopping for altcoins utilizing futures doesn’t enable one to make use of them for staking or lending. For buyers prepared to hold a place for a longer-term, that is one other issue to think about.

There are quite a few platforms providing staking and lending providers, together with the highest centralized exchanges. Among the altcoins providing 30-day contract annual proportion yields (APY) that may vary from 7% to 18% are Polkadot (DOT), Tron (TRX), Cosmos (ATOM), and Cardano (ADA).

Decentralized (DeFi) mining swimming pools are one other method to generate earnings by holding altcoins. Customers ought to watch out for this sector’s inherent dangers, particularly these swimming pools with impairment loss occurring between two completely different cryptocurrencies.

Present DeFi yield returns. Supply: CoinMarketCap

Thus, by choosing perpetual futures, one won’t be able to partake in staking and yield farming. It won’t affect the choice for these betting on short-term worth swings, but it surely weighs extra because the weeks go by.