1. Coin-Margined Futures Basic Concepts

1.1 Definition and Connotation

Coin-Margined Futures, essentially derivatives with specific cryptocurrencies as the unit of account and settlement method. In such contract trading, investors predict the price fluctuations of the underlying cryptocurrency at a specific future time through buying and selling contracts, in order to gain profits or hedge risks. Unlike traditional financial contracts, which are denominated and settled in fiat currency (such as the US dollar), coin-margined futures are centered around cryptocurrencies throughout the entire process, including trading, profit and loss calculation, and margin deposits, all of which are based on specific cryptocurrencies.

Taking Bitcoin coin-margined futures as an example, if investors are bullish on the future price of Bitcoin, they can choose to go long on Bitcoin coin-margined futures, that is, to establish a long position; conversely, if they expect the price of Bitcoin to fall, they can go short on Bitcoin coin-margined futures, establishing a short position. When an investor uses 1x leverage to buy one Bitcoin coin-margined futures contract at a Bitcoin price of $50,000, and the Bitcoin price later rises to $60,000, the investor sells the contract, resulting in a profit equivalent to the amount of 10,000 USD in Bitcoin. Throughout this process, both the initial margin and the final profit are denominated in Bitcoin.

This contract design based on cryptocurrency enables investors to participate more directly in the price fluctuations of the cryptocurrency market, while also providing an effective risk management and asset appreciation tool for investors holding large amounts of cryptocurrency. For example, investors who hold Bitcoin for a long time can use Bitcoin coin-margined futures for hedging operations. Hedging refers to buying and selling the same type of cryptocurrency in equal quantities but in opposite directions in the spot market and the futures market simultaneously. Therefore, financial instruments are used to offset the losses caused by unfavorable changes in cryptocurrency prices. This can partially mitigate the risk of asset loss caused by a drop in Bitcoin price.

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2. Coin-Margined Futures Trading Mechanism

2.1 Margin Trading

2.1.1 Leverage Principle

Leveraged trading in Coin-Margined Futures is like a double-edged sword, as it can greatly amplify investment returns, but also increase investment risks accordingly. The core principle is to borrow funds to speculate on a larger scale, allowing investors to control contract positions of greater value with less of their own capital.

Using Bitcoin coin-margined futures as an example, assuming the current Bitcoin price is $50,000, an investor predicts that the Bitcoin price will rise and chooses to trade with 10x leverage. If the investor has 1 Bitcoin as collateral (worth $50,000), with the effect of 10x leverage, the investor can buy a Bitcoin coin-margined futures worth $500,000, equivalent to controlling a contract position of 10 Bitcoins. When the Bitcoin price rises as expected by 10% to $55,000, the investor sells the contract, and the profit is (55,000-50,000) × 10 = $50,000. Converted into 1 Bitcoin, the return rate is as high as 100% (without considering other costs such as transaction fees). This is the significant effect of leveraging profits.

However, if the price of Bitcoin falls by 10% to $45,000, the investor’s loss will be ($50,000 - $45,000) × 10 = $5,000. With just 1 Bitcoin, his entire principal will be lost at this point, and he may even face forced liquidation due to insufficient margin. This fully illustrates the characteristic of leverage trading, which amplifies risks while magnifying profits.

2.1.2 Leverage Selection

In Coin-Margined Futures trading, the choice of leverage is crucial, as it directly affects the balance between investment returns and risks. Different leverage ratios apply to different market scenarios and investor types.

Low leverage (such as 2-5 times), suitable for investors with lower risk tolerance and more stable investment styles. In relatively stable market conditions with smaller price fluctuations, low leverage can help investors control risk and obtain certain returns. For example, when the market is in a consolidation phase and the trend is relatively unclear, investors can trade with low leverage, even if the price undergoes a certain degree of reverse fluctuation, they will not suffer significant losses.

When investors choose the leverage ratio, they need to consider their own risk tolerance, investment experience, market judgment, and actual market conditions comprehensively. At the same time, they should always be cautious and avoid blindly using high leverage ratios due to excessive pursuit of high returns, thus falling into great risks.

2.2 Contract Types

2.2.1 Coin-Margined Perpetual Contract

Coin-Margined Perpetual Contract is a type of cryptocurrency derivative contract with no expiration date. Investors can choose to long or short the contract based on the market price trend to earn corresponding profits. Its price usually tracks closely to the reference index, and the key mechanism is to adjust the market price through funding rates. Settlement is conducted every 8 hours, and the realized and unrealized profits and losses are updated to the user’s account during settlement. Investors can hold their positions continuously until they actively choose to close them.

2.2.2 Coin-Margined Futures

Coin-Margined Futures is a type of cryptocurrency derivative contract with a fixed expiration date. When the contract expires, all open positions will be settled by the arithmetic average price of the index in the last hour, instead of physical delivery. Coin-Margined Futures usually have different contract types with different expiration times, such as weekly, bi-weekly, quarterly, etc. Investors need to close their positions before the contract expires or wait for settlement at expiration.

2.2.3 Differences and Connections Between the Two

2.3 The Difference and Connection between Coin-Margined Futures and U-Margined Futures

Three, Coin-Margined Futures Features

3.1 High leverage brings high returns and high risks

In the field of Coin-Margined Futures trading, high leverage is undoubtedly a powerful double-edged sword. The core principle is to control contract positions far exceeding the principal value with a relatively small margin, thus achieving the investment effect of making big profits with a small investment.

When the price of Bitcoin is $50,000, if an investor owns 1 Bitcoin (worth $50,000) and chooses to trade with 10x leverage, they can buy a coin-margined futures contract worth $500,000, which is equivalent to controlling a position of 10 Bitcoins. When the Bitcoin price rises as expected by 10% to $55,000, the investor sells the contract, and the profit is calculated as (55000 - 50000) × 10 = $50,000, which is equivalent to 1 Bitcoin, with a high return of 100% (not considering transaction fees and other costs). This vividly demonstrates the powerful effect of high leverage in amplifying returns, enabling investors to achieve substantial appreciation of assets in the short term.

3.2 Trading Flexibility

1. Bidirectional Trading: Coin-Margined Futures provide investors with the freedom to engage in bidirectional trading in the market, allowing them to adapt flexibly to different market conditions and capture investment opportunities. In traditional investment markets, investors are often limited to profiting only when prices rise by buying assets. Once the market enters a downward trend, it becomes difficult to find effective ways to profit.

In coin-margined futures trading, if investors anticipate that the market price will rise, they can establish a position by buying long contracts, and then sell the contracts after the price rises, realizing a profit from buying low and selling high. Conversely, if investors believe that the market price will fall, they can choose to sell short contracts, borrowing assets to sell at the current higher price, and then buy back at a lower price to return, thus profiting from the price decline.

When the price of Bitcoin is in an upward trend, investors buy Bitcoin coin-margined long contracts. As the price of Bitcoin climbs, the contract value increases, and investors can profit by selling the contract. When the market reverses and the price of Bitcoin starts to fall, investors can quickly switch strategies and sell Bitcoin coin-margined short contracts to profit from the price decline. This mechanism of operating in both long and short directions greatly expands the profit space for investors, allowing them to flexibly deploy in a complex and ever-changing market environment, effectively avoiding the limitations of investing in a single direction.

1. Multiple leverage options: On the Coin-Margined Futures trading platform, investors are usually provided with a wide range of leverage options, ranging from lower leverage such as 5x and 10x, to higher leverage such as 50x, 100x, or even higher. Different leverage levels are suitable for investors with different risk preferences and investment strategies. For investors with lower risk tolerance and a more conservative investment style, they can choose lower leverage such as 5x or 10x. In this case, although the amplification effect of leverage is relatively limited, investors are able to control risks to a certain extent and avoid substantial losses caused by excessive market fluctuations. On the other hand, for investors with higher risk tolerance, strong market trend judgment ability, and a pursuit of high returns, they can choose higher leverage such as 50x or 100x. Through higher leverage, they can control larger contract positions with less margin, and once the market trend meets expectations, they will gain substantial profits. However, it needs to be clear that while higher leverage brings higher potential returns, it also comes with extremely high risks, so investors must carefully weigh their choices.
2. 24/7 Trading: Unlike traditional financial markets that are subject to strict trading hours, Coin-Margined Futures trading is available 24 hours a day, allowing uninterrupted trading. This is due to the global nature of the cryptocurrency market and its advantage of not being constrained by the operating hours of traditional financial institutions. In traditional financial markets such as the stock market and futures market, trading is typically limited to specific working days and time periods, preventing investors from responding to market dynamics outside of trading hours.

The round-the-clock trading feature of Coin-Margined Futures allows investors to trade based on global market changes at any time. Whether it is day or night, weekdays or holidays, as long as there are investment opportunities in the market, investors can quickly make decisions to buy or sell contracts. When major political events or economic data are announced internationally, the cryptocurrency market often reacts sharply in a short period of time. At this time, investors in Coin-Margined Futures can trade at the first time and seize the opportunities brought by market fluctuations. Round-the-clock trading provides investors with more flexible trading time options, enabling them to better adapt to the fast-paced market changes and adjust investment strategies in a timely manner.

4. Risk of Coin-Margined Futures

4.1 Market Volatility Risk

The causes of market volatility risk are complex. On the one hand, the cryptocurrency market lacks effective regulatory mechanisms, and the behavior of market participants is relatively free, making it susceptible to market sentiment. When there is panic in the market, investors sell off cryptocurrencies, leading to a sharp drop in prices; and when market sentiment is optimistic, a large amount of capital flows in, driving prices to rise rapidly. On the other hand, the market supply and demand relationship of cryptocurrencies is also unstable. New cryptocurrency projects continue to emerge, increasing market supply; while the demand for cryptocurrencies is influenced by various factors such as the macroeconomic environment, policy changes, and technological developments, resulting in significant fluctuations in demand. In addition, the cryptocurrency market is also affected by major events, such as Tesla’s announcement to suspend Bitcoin payments, which caused a sharp drop in the price of Bitcoin. These factors collectively contribute to the volatile price fluctuations in the cryptocurrency market, posing significant market volatility risks for coin-margined futures investments.

4.2 Leveraged Risk

The generation of leverage risk is mainly due to the amplification effect of leverage. When investors use leverage, they only need to pay a certain proportion of margin to control contract positions that far exceed the value of the margin. This allows investors’ profits and losses to be magnified by the leverage multiple. Once the market price undergoes unfavorable fluctuations, investors’ losses will quickly accumulate. When the margin is insufficient to cover the losses, the forced liquidation mechanism will be triggered. Investors’ risk awareness and ability also have a significant impact on leverage risk. Some investors do not set reasonable stop-loss and take-profit levels during the trading process, or blindly pursue high returns and excessively use leverage, which increases the probability of leverage risk occurrence.

4.3 Liquidity Risk

In some cases, low liquidity in some Coin-Margined Futures may pose difficulties for investors to close positions due to fewer market participants. When there is low demand for a certain Coin-Margined Futures contract, investors may have difficulty finding sufficient counterparties to take over their contracts when they want to sell and close positions, especially when market conditions change suddenly and investors need to close positions urgently. This situation becomes more severe in the Coin-Margined Futures markets of some niche cryptocurrencies, where limited trading participants and insufficient market depth may result in a lack of sufficient buy orders in the market when investors with large positions need to close positions. As a result, they may be unable to sell their contracts at a reasonable price in a timely manner and are forced to accept lower prices, leading to significant losses.

The main causes of liquidity risk are related to the structure and characteristics of the cryptocurrency market. Some emerging or niche cryptocurrencies, with low market visibility and low investor participation, result in lower trading activity for related coin-margined futures contracts. Market fluctuations also affect liquidity. When the market experiences significant fluctuations, investor sentiment may be affected, leading to reduced trading activity and further decreased market liquidity. In addition, the design and operation of the trading platform also have a certain impact on liquidity. If the number of users on the trading platform is limited, or if the trading mechanism is not sound enough, it may also result in insufficient liquidity for coin-margined futures contracts.

Five, Coin-Margined Futures Application Scenarios

5.1 Speculative Trading

In the application field of Coin-Margined Futures, speculative trading is a common and attractive strategy, which is based on investors’ sharp judgment of the trend of cryptocurrency prices to profit from the price difference by buying and selling Coin-Margined Futures. Taking Bitcoin as an example, when a series of positive news appears in the market, such as a large financial institution announcing plans to invest in Bitcoin, or a country’s regulatory policy towards Bitcoin becomes more relaxed, some investors will predict that the price of Bitcoin will rise in the short term based on this information. They will quickly buy Bitcoin long contracts in Coin-Margined Futures, expecting to sell the contracts after the price rises and make a profit from the price difference. If the price of Bitcoin does rise as expected, from $50,000 to $60,000, investors sell the contracts and realize their profits.

5.2 Hedging

Cryptocurrency hedging is a risk management strategy used to reduce the risks associated with cryptocurrency price fluctuations. Hedging refers to conducting equal but opposite buying and selling activities of the same type of cryptocurrency in the spot and futures markets. This helps to offset the losses caused by unfavorable cryptocurrency price movements using financial instruments.

Assuming that an investor holds a large amount of Ethereum for a long time, and the current price of Ethereum is $3000. However, the recent market environment is complex and changeable, and the investor is worried that the price of Ethereum may plummet, leading to a significant shrinkage of their assets. In order to avoid this risk, the investor decides to use Coin-Margined Futures for hedging. The specific operation is as follows: when the ETH price is $3000, buy 100 ETH spot assets. At the same time, in the perpetual contract trading market, sell short a contract with the same value as 100 ETH to offset the risk of ETH price fluctuations.

5.3 Arbitrage Trading

Arbitrage trading is a strategy in the application of Coin-Margined Futures that takes advantage of price differences between different trading platforms or different contracts to obtain risk-free or low-risk profits. Due to differences in market depth, liquidity, and investor base between different trading platforms, the price of the same cryptocurrency coin-margined contract may vary. For example, the price of a bitcoin coin-margined contract on platform A is $50,000, while on platform B it is $50,500. At this time, an arbitrageur can buy bitcoin coin-margined contracts on platform A and sell the same quantity of contracts on platform B. Through this buy low and sell high operation, they can earn a price difference of $500 per bitcoin.

There are arbitrage opportunities between different contracts. On the same trading platform, the prices of Bitcoin’s weekly coin-margined futures and quarterly coin-margined futures may differ due to different market expectations and funding costs. If the price of the weekly contract is relatively low and the price of the quarterly contract is relatively high, arbitrageurs can buy the weekly contract and sell the quarterly contract. As time passes, the price of the weekly contract may approach the price of the quarterly contract as it approaches delivery. At this point, arbitrageurs can perform the reverse operation by selling the weekly contract and buying the quarterly contract, thereby realizing profits.

Accurate price monitoring is crucial for successful arbitrage trading. Arbitrageurs need to rely on professional market monitoring software to monitor the price changes of various trading platforms and different contracts in real time, and promptly discover price differences. Fast trading execution ability is also key. Once an arbitrage opportunity is identified, the arbitrageur must be able to quickly buy and sell between different platforms or contracts to ensure that the transaction is completed before the price difference disappears. In practical operation, due to factors such as trading speed and network latency of the trading platform, the execution of the transaction may be delayed, which affects the arbitrage effect. Therefore, arbitrageurs need to choose trading platforms with fast trading speed and high stability, and optimize the network environment to improve transaction execution efficiency.

Conclusion

As an important product in the cryptocurrency derivatives market, Coin-Margined Futures not only provides investors with abundant trading opportunities but also brings many challenges. When choosing whether to participate in coin-margined futures trading, investors should fully understand its working principles, market environment, and potential risks, and make decisions based on their risk tolerance. In the future, with the development of the market, coin-margined futures may become the preferred tool for more and more cryptocurrency investors and traders.

Disclaimer

This content is for reference only and does not constitute investment advice. Contract trading carries high risks and may result in capital loss. Please participate with caution based on your own risk tolerance. Trading carries risks, and investment should be cautious.