3 Factors To Consider Before Trading Crypto Perpetual Futures Contracts


As tempting as it is to buy altcoins with perpetual futures, there are a few hidden pitfalls that should be watched carefully.

In recent years, numerous exchanges began offering altcoin futures listed in tether (USDT) and stablecoin pairs, which eventually became the standard. This change is more convenient for most traders, but it poses some serious problems for those willing to keep long positions open for more than a few weeks.

Related articles

Before opening a trade on an exchange that offers perpetual futures, traders should be aware that stronger wicks can cause stop losses, investors are no longer able to use their altcoins for lucrative returns, and that the variable Financing rate can significantly increase the cost of conducting a trade.

Leverage leads to stronger wicks

Regardless of how liquid a market is, leverage leads to stronger wicks. Even if these steps do not usually result in a forced liquidation, it can cause investors to stop.

Hence, the possibility of faulty wicks is the main reason traders should avoid holding futures positions for extended periods of time.

Futures liquidation engines use a price index made up of several (regular) cash exchanges to avoid price manipulation. Therefore, the system will not close positions with insufficient margin until an index reaches its stops.

Ether Coinbase and Binance Perpetual Futures. Source: trade view

Note that ETH hit a low of $ 326 on Coinbase while Binance futures also hit a low of $ 302. This change may seem small, but it certainly triggered traders’ stop orders.

There is a way to avoid such problems by simply setting the stop order trigger to Mark Price (Index) instead of Last Price.

BTC futures contract Trigger price selection. Source: Binance

This simple change avoids liquidation if futures contracts monetarily decouple from their index. The big problem is that not every exchange offers this possibility.

Staking and liquidity mining may offer better returns

If you buy altcoins with futures, you cannot use them for staking or borrowing. For investors willing to take a longer term position, this is another factor to consider.

There are numerous platforms that offer staking and lending services, including the major central exchanges. Some of the altcoins with 30-day annual contract returns (APY) between 7% and 18% are Polkadot (DOT), Tron (TRX), Cosmos (ATOM), and Cardano (ADA).

Decentralized (DeFi) mining pools are another way to generate income by holding altcoins. Users should be aware of the risks inherent in this sector, especially the pools of depreciation expense between two different cryptocurrencies.

The current DeFi yield returns. Source: CoinMarketCap

So if one chooses an eternal future, one cannot participate in staking out and productive agriculture. It may not affect the decision for those who rely on short-term price fluctuations, but it weighs more as the weeks go by.