Coin-margined vs. Stablecoin-margined: Why is the latter preferred during a bear market?
While many investors are adopting a wait-and-see attitude regarding the direction in which the crypto market is headed, incidents such as the Terra-Luna crash, the collapse of Celsius, and Three Arrows Capital’s insolvency have exaggerated already bearish conditions.
Current negative market sentiments have resulted in significant challenges for traders looking to profit via the traditional buy low and sell high strategy; therefore, contract products are proving to be a preferred choice compared to spot trading.
Derivatives products come in all shapes and forms to suit different trading profiles. These can include coin-margined futures/swaps, stablecoin-margined futures/swaps, options, and more. Before deciding which product to trade, investors should first comprehend the differences between the two.
Coin-margined contracts
Coin-margined contracts use underlying assets such as BTC or ETH as margin(collateral). Such contracts are denominated and settled using the underlying cryptocurrency. Users can profit from the price change of a digital asset by either going long or short based on their own judgment.
Coin-margined contracts can be divided into coin-margined swaps and coin-margined futures. For example, we usually see BTC/USD swaps or BTC/USD futures (including weekly, bi-weekly, and quarterly futures) available to traders.
Stablecoin-margined contracts
Stable-margined contracts are digital asset derivatives that use stablecoins such as USDT or USDC as margin (collateral). Such contracts are denominated and settled using the stipulated stablecoin. Users can profit from the price change of a digital asset by either going long or short based on how they think the asset will perform.
Stablecoin-margined contracts can be divided into stablecoin-margined swaps and stablecoin-margined futures. BTC/USDT swaps or BTC/USDT futures (including weekly and bi-weekly futures) are usually available on the Huobi Futures trading page.
From the above definitions of the two contract types listed above, it’s easy to conclude that stablecoin-margined contracts are more suitable for the current bearish climate. Here’s why:
- No need to prepare underlying assets as margin
Unlike coin-margined contracts which use the underlying asset of a certain contract as the margin, stablecoin-margined contracts use the stablecoin as margin, meaning investors do not need to bear the risk of an underlying asset’s price decline.
2. Lower liquidation risk
For coin-margined contracts, the margin value will rise and fall in accordance with the price of the underlying asset. Take BTC/USD swaps as an example. Assuming an investor expects the price of BTC to rise over a short period and opens a long position. However, the reverse happens and the price of BTC dips instead. Given such a situation, the margin value will also continue to decrease in accordance with the fall in BTC price.
3. Stable profits
Stablecoin-margined contracts ensure a stable profit that cannot be realized with coin-margined contracts. Take BTC/USD swaps as an example; assuming an investor opens a short position at 0.1 BTC when the price of BTC is 30,000 USDT. The investor then closes the position when the price falls to 20,000 USDT. For coin-margined swaps, the profit and loss will be calculated in BTC, so she will earn 0.1*(30,000–20,000)/20,000=0.05 BTC. The 0.05 BTC was worth 1,500 USDT when the investor opened the position but is only worth 1,000 USDT at when the position is closed. Such problems will not happen if the investor chooses stablecoin-margined contracts, because, with stablecoin-margined contracts, either profit or loss is calculated in stablecoin.
USD Coin (USDC), a stablecoin overseen by an entity called the Centre Consortium that was established by Coinbase and Circle, aims to maintain its 1:1 peg to the United States Dollar. After the Terra-Luna crash in May 2022, USDC’s market share surged, making it the world’s second-largest stablecoin with a market cap of US$55.88 billion, second only to USDT’s US$66.02 billion, according to data from CoinMarketCap on July 5.
The bear market may not bottom out so quickly in the short term. Profit-making opportunities abound during fluctuating market conditions, whether long or short positions are adopted. Choosing stablecoin contract trading, be it USDT-margined or USDC-margined, can help lock in income and prevent shrinkage. For more stablecoin-based contract trading tutorials, click here.
