3 things every trader should know about derivatives exchanges

Understanding Open Interest (OI), funding rates, and the difference between futures contracts is a starting point for any investor interested in trading crypto-based derivatives.

In the past two years, futures contracts have gained immense popularity with crypto traders, which is even more evident as the total open interest in derivatives has more than doubled in three months.

Further evidence of their popularity is that sales from futures trading overtook gold, a long-running market valued at $ 107 billion daily.

However, each exchange has its own order book, index calculation, leverage limit and rules for cross margin and isolated margin. These differences may seem superficial at first, but can make a huge difference depending on a trader’s needs.

Open contract

Compound Futures Open Interest (blue) and daily volume (black) | Source: Bybt

As shown above, futures open interest has grown from $ 19 billion to $ 41 billion in three months. Meanwhile, the daily trading volume exceeded $ 120 billion, well above the $ 107 billion of gold.

While Binance futures have a larger share of this market, some competitors with relevant trading volume and open interest include FTX, Bybit, and OKEx. Some of the differences between exchanges are obvious, such as: B. FTX, which charge unlimited contracts (reverse swaps) every hour instead of the usual 8 hours.

Open interest for BTC and ETH futures | Source: Bybt

Note that CME ranks third in Bitcoin futures even though it only offers monthly contracts. Traditional CME derivatives markets are also notable for their margin requirements of up to 60%, although brokers may offer leverage to certain clients.

Stable coins With Token Margin Contract

For crypto exchanges, most allow 100x leverage. Tether (USDT) trade orders are usually denominated in BTC. In the meantime, Inverse Perpetual (Token Margin) contracts are displayed in the contracts, which can have a value of USD 1 or USD 100, depending on the exchange.

Entering BTC futures orders | Source: Bybit

The picture above shows a USDT futures order entry that requires an amount in BTC on Bybit, the same process takes place at Binance. On the other hand, OKEx and FTX provide users with an easier option that allows customers to enter the amount of USDT while automatically converting it to the value of BTC.

Entering BTC futures orders | Source: OKEx

In addition to USDT-based contracts, OKEx offers a USDK pair. Similarly, Binance Perpetual Futures also offer Binance USD (BUSD). Hence, for those who do not want to use Tether as collateral, there are other options.

Changes in the funding rate

Some exchanges allow clients to use very high leverage and while this may not pose an overall risk due to the liquidation incentives and insurance funds that exist for these situations, it will put pressure on the funding rate. As a result, long trades on these exchanges are often penalized.

Funding quota of the ETH futures | Source: Bybt

The graph above shows that Bybit and Binance typically have higher funding rates, while OKEx has consistently lows. Traders need to understand that there are no rules to enforce this and that prices can vary based on asset value or require leverage in the short term.

Even a 0.05% spread equals 1% of the additional cost per week, which means it’s important to compare funding rates from time to time, especially in bull markets when fees are rising rapidly.

Teacher

According to Cointelegraph

Follow the Youtube Channel | Subscribe to telegram channel | Follow the Facebook page