About Binance
Binance still remains the world number one place to buy, sell and trade cryptocurrency mainly due to its high levels of liquidity, low fee structure, broad range of products, helpful community, transparent leadership and high levels of account security. As a platform Binance offers everything the modern crypto trader requires.
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Binance – number one exchange to buy, hold and trade cryptocurrency in the world today
What are Futures (delivery, quarterly, perpetual)?
A futures contract is simply a contract to make a trade at a future date at an agreed upon price. Binance offer two different types of futures contracts – perpetual and delivery which is also known as quarterly. As you might imagine perpetual futures contracts have no end date whereas delivery have an agreed upon end date roughly three months after their initiation.
The holder of the Perpetual Futures contract may keep the contract open for as long as they wish unless the position is liquidated through lack of margin. Delivery Futures on the other hand are always executed at the expiry date however the holder may execute before the expiry date.
Anyone who opens a futures contract has the opportunity to both speculate on the rise (long) or fall (short) of the opening price. Futures holders are also able to take advantage of leverage in order to increase their exposure to an underlying asset. Both features are unique to crypto derivatives and not available on the spot market.
What are Options?
Options are contracts which provide the buyer with the ‘right to buy’ (call option) or the ‘right to sell’ (put option). Conversely, the seller of an Options contract (the writer) is obligated to execute the trade if the contract holder wishes to exercise their will.
Binance ‘vanilla’ Options are a relatively new feature and as yet only offer the opportunity to buy and sell BTC, ETH, BNB, LTC, XRP and LINK contracts. The total volume traded in the last 24 hours amounts to 1810.25 Bitcoin ($83 million).
Options contracts have traditionally been valued for their flexibility and their use as hedges against more riskier positions. However, options are also associated with poor liquidity and being too complicated for the average trader. Furthermore, premium prices tend to suffer from volatility and reduce in value the near they get to expiry. This is still true in the cryptocurrency world.
Binance Futures
Binance has two futures products available to the trader – USD(S)-M and COIN-M giving the trader the option to settle in either stablecoin or crypto.
USD(S)-M Futures
• Crypto futures contracts quoted and settled with stablecoin USDT or BUSD (Binance USD).
• Perpetual or quarterly (delivery).
• Perpetual Futures offer the greatest variety of liquid markets but incur additional costs due to funding fees.
• Quarterly (delivery) are easy to understand and incur no funding fee but traders must hold significant USDT balance to avoid liquidation.
Coin-M Futures
• Quoted and settled with the underlying crypto (eg BTC).
• Perpetual or quarterly (delivery).
• Perpetual Futures have the ability to generate maximum profit in bull markets but are exposed to significant funding fees.
• Quarterly Futures don’t incur fees. The collateral used (margin) increases along with the price but tighter risk management needed as collateral is exposed to price discovery.
Difference between Spot Trading and Futures Trading
There is a significant difference between the trading futures and spot markets. The fundamental difference is futures only trade the ‘agreement to settle’ whereas spot actually trade the asset itself.
The opportunity to trade futures present many opportunities for significant gains through the use of leverage however there is always the danger of the position being auto liquidated when collateral is not enough to cover any loss. Consequently, trading futures on Binance requires a highly focussed and high risk management approach.
Futures also give the trader the opportunity to open a long or short position as there is no actual ownership of assets. Funding fees when trading futures can be significant though and are directly tied to the spot market price. The futures price is often slightly higher than the spot price.
Spot trading is generally thought to be less risky and volatile as there is no leverage available and therefore no chance of auto-liquidation. Spot positions also have a more long term perspective although profits are only made when the asset increases in value. Spot trading also involves the instantaneous delivery of the asset and therefore may provide the holder with to voting or staking right associated with the token.
The difference between the two prices is never too wide as the funding rate mechanism calibrates every eight hours to keep the prices balanced.
Leverage Trading
Binance is well known for its extensive portfolio of cryptocurrency available to trade with leverage and continues to maintain the number one position in the market in terms of daily trading volume.
After recent regulatory ruling Binance now offer leverage positions of upto 25 x over hundreds of crypto pairs. Leverage trading can be very lucrative but comes with a high amount of risk. Any open position will be auto-liquidated by the exchange if the collateral is not enough to cover the loss. The platform automatically calculates the break even point for you when you place the leveraged trade which at first makes the user interface look complicated but after a short while it is informative and easy to understand.
Funding rate
A funding rate is applied to all leveraged futures positions. As perpetual contracts never settle a mechanism is needed to keep perpetual prices in line with spot prices. The funding rate therefore is calculated and applied to positions every eight hours and can be significant. Fees are either paid or received depending on the positions and the difference between prices. Generally speaking when the market is bullish the funding rate is positive and fees are paid by those in long positions. Conversely when the market is bearish the funding rate is negative and those in short positions pay the funding rate.
Collateral
Collateral can be defined as something which is given as a guarantee and acts as a safe guard in the interim. In leveraged futures trading collateral refers to assets which are kept by the exchange to cover any potential losses which are incurred with leverage. The Binance platform automatically checks your remaining account balance (USDT or BTC) and what collateral is available and calculates the auto-liquidation point accordingly. If the asset price falls to this point Binance will automatically close your position in order to mitigate the loss. This can be extremely painful.
Risks
The risk involved with trading futures contracts, either delivery or perpetual, is significant and it is not recommended for people new to either trading or crypto. To be successful a trader must have a high tolerance for risk, a lazer like focus and a disciplined approach to managing capital. The temptation to open highly leveraged positions can be overwhelming to newcomers and therefore the appropriate management of emotion and self control is required at all times. However, with the right balance of focus and discipline it is possible to build significant profit in a relatively short space of time.
Binance Fees
Binance uses a fee tier system based on 30 day trade volume with fees falling exponentially upto a maximum of 750,000 BTC traded within 30 days. The fee structure for futures products mirror spot fees but are generally lower. Binance generally has some of the lowest on the market with rates starting anywhere between 0.02% and 0.04%. Traders can receive an extra 10% discount if they pay their fees with Binance native cryptocurrency BNB.
Binance Security
As everyone knows buying, holding and trading cryptocurrency in an unregulated market comes with a considerable amount of inherent risk. However, as the worlds premier crypto trading platform, Binance does a good job of promoting responsible trading while ensuring all of its products and services are best in class in terms of security.
Here are a few basics that any crypto trader or investor should be aware of and use at all times –
• Always use strong and site unique password.
• Always use 2FA.
• Don’t boast about holdings or trading success.
• Never mention balances.
• Never share previous addresses.
• Don’t divulge details of your personal life.
• Use encryption where applicable.
As an unregulated industry crypto doesn’t offer the same levels of consumer protection found in the traditional investment market and therefore users must be vigilant and aware at all times. It pays to be aware of common phishing attacks and to be on the guard for suspicious emails, texts and calls.
Binance security is second to none and as a user for over three years I have never had a problem with the platform. Hacks of the platform are very rare although in June 2021 hackers did manage to gain access to Fetch.ai wallet but were unable to remove the assets due to security restrictions. The general consensus is to not keep too large an amount on a trading platform as Binance like other platforms are non custodial. Essentially this means if you do not own the keys then you do not own the coins. Cold storage wallets such as Trezor and Ledger Nano are thought to be the best bet. Human error is still a primary cause for loss of funds so be sure to always check addresses twice before sending any cryptocurrency across the network.
Conclusion
The crypto derivatives offered by Binance are some of the most trusted and respected products on the crypto market today and Binance is a great place for anyone looking to develop this angle of their crypto trading experience.
However, as we have highlighted trading crypto derivatives is a highly risky endeavour and can lead to large losses in a short space of time. Therefore it requires a high degree of self control and risk management.
The financial application of cryptocurrency is becoming increasingly popular as more people become comfortable with the concept and use of digital assets. However, regulatory pressure over the sale of crypto derivatives is an ongoing and real concern and until there is a clear horizon ahead users are advised to proceed with a high level of scepticism and caution.