Market Sentiment and Hedging Strategies Hidden in Crypto Futures Contracts
This article is from the summit AscendEX financial class, reproduced with authorization.
In recent years, the cryptocurrency market has increasingly absorbed and applied traditional financial derivatives. Cryptocurrency futures contracts derived from spot contracts and spot forward contracts have been encrypted because they can realize market price risk transfer and risk return acquisition. Enthusiastically sought after by currency market participants.
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Funding rate: the "weather vane" of long-short sentiment
In traditional futures contract trading, due to the setting of the delivery date, when the delivery is approaching, the market futures price will be close to the spot price until it is consistent. Then, how is the price of a perpetual contract that does not involve delivery settlement adjusted through the market?
Obviously, at this time, a rate mechanism is needed to help the perpetual contract anchor the spot price, that is, when the perpetual contract price deviates greatly from the spot price, this mechanism can bring the price difference back to a reasonable range. Based on this, the funding rate mechanism came into being. Its main function is to ensure that the futures price of the perpetual contract is relatively consistent with the spot price, and to control a reasonable price difference.
As a major feature of the perpetual contract, the funding rate mechanism can make the price point to and return to the spot index price as much as possible. Therefore, unlike delivery contracts, the price of perpetual contracts tends to deviate relatively little from the spot price. This is because the mechanism calculates and adjusts the settlement of funding fees between long (call) and short (put) positions in a contract position at a certain time interval (usually 8 hours).
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Looking at the crypto market sentiment from the funding rate
Funding fees generated under the funding rate mechanism are different from transaction fees and are paid between long and short positions. Through this "extra" fee, the contract trades at a price close to the spot index price.
In the funding rate, it usually consists of two parts: financing rate and asset premium. Within the 8-hour financing period, the interest rate is generally fixed at 0.01%, and the remaining premium comes from the difference between the contract and the spot price. Regardless of the relatively fixed financing rate, from the perspective of premium, the funding rate can reflect the investment enthusiasm of a certain encrypted asset within a certain period of time, that is, whether the market sentiment is more or less.
Through the operation of the funding rate mechanism, the price of the perpetual contract has achieved the effect of long-term convergence with the spot market price. That is to say, according to changes in market conditions, the long or short side pays funding fees to the counterparty for each other, which invisibly prompts the contract traders to adjust their positions in a timely manner and become the party that collects funding fees.
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Risk hedging: "keep existing" in extreme market conditions
As an emerging financial market, the spot market of the cryptocurrency market has inherent characteristics such as uncertainty and volatility. Risk hedging is necessary to carry out relevant investment and trading activities. In the traditional financial market, the derivatives market, as an extension of the spot market, has the functions of stabilizing the market, avoiding risks and discovering prices.
The so-called risk hedging refers to the risk management strategy of writing off the potential loss of the underlying asset by investing and purchasing assets or derivatives that are negatively correlated with the fluctuation of the underlying asset income. In the cryptocurrency market, risk hedging is also an effective way to deal with the risk of market fluctuations.
Generally speaking, hedging strategies allow traders to reduce investment risk by placing bets in the opposite direction of an investment. As a risk management skill that cryptocurrency investors should have, risk hedging can ensure that investors can maximize the stability of investment value even if they are in a harsh market environment.
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A "good strategy" for risk hedging: perpetual contracts
With the blessing of the flexible position mechanism of perpetual contracts, investors can open or exit contract positions at any time without considering the constraints of the delivery date. And by setting up a trading position with the same quantity as the spot market, but in the opposite direction, and buying and selling contracts of the same amount in a certain period of time in the future, hedging the actual price loss in the spot market.
Compared with spot trading, through perpetual contract trading, investors are often able to take better advantage of price fluctuations, and use bullish and bearish two-way investment methods to expand a larger profitable space. At the same time, with the cooperation of the funding rate mechanism, the positions opened by investors will continue in the circulation of mutual payment of funding fees between long and short parties.
However, it should be noted that using a perpetual contract whose transaction price is close to the price of the underlying asset index as a hedging strategy requires careful consideration of the selection of the contract leverage ratio in addition to grasping the current funding rate.
Because with the cooperation of the leverage mechanism, the amount of funds for contract transactions can be effectively enlarged. Although this can greatly reduce the threshold for funds to enter the market, it will also increase the risk of transactions accordingly. Therefore, investors need to deposit a certain percentage of margin in the contract account to ensure the normal development of contract transactions.
Generally speaking, as a hedging strategy, perpetual contracts will attract more investors to participate because of their high liquidity. At the same time, contract leverage supports the realization of more returns with less actual investment and promotes the generation of arbitrage. However, the positive and negative volatility of the funding rate will make the hedging cost of the perpetual contract difficult to predict, and the improper use of high leverage will also bring additional risks.
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Summit AscendEX Perpetual Contract: Create a diverse, professional and safe investment environment
In the first half of 2021, AscendEX (asdx.io) has developed a strong ecosystem of encrypted financial derivatives, especially in the creation of perpetual contracts, which has rapidly expanded from 1 at the beginning of the year to more than 20 currently. Among them, there are many exclusive CSPRUSDT and OMIUSDT perpetual contracts in the world, which can meet the investment and transaction needs of diversified users in the market.
With the continuous enrichment of perpetual contract categories, Summit AscendEX has also innovatively launched an optimized and upgraded version of the mixed margin system, which eliminates all substantive mortgage conditions and allows the multi-currency margin solution to play its role in the most concise, efficient and economical form. best value.
In terms of new contracts, Summit AscendEX maintains a constant pace of progress. On June 22, VETUSDT, UNIUSDT, and ONEUSDT perpetual contracts were strongly launched on the Web, APP, and API, and adopted the USDT pricing and settlement mechanism. Among them, UNIUSDT supports up to 100 times leverage, and VETUSDT and ONEUSDT support up to 50 times leverage.
Synchronized with the new contracts, the mixed margin products are also updated. As of now, Summit AscendEX supports USDC, PAX, BTC, ETH, LINK, BCH, DOT, XRP, BNB, MATIC, TRX, ADA, FIL, FTT, ETC, VET and UNI as non-USDT asset margins for contract transactions. Investors use the above-mentioned currencies as contract margins, and will directly display the amount of margins that are automatically converted into USDT without the need for exchange, mortgage, or sale.
Adhering to the principle of "customer first", based on the excellent experience and professionalism accumulated in traditional finance for many years, AscendEX always adheres to the inclusive value thinking of Wall Street financial market to create a safe and reliable cryptocurrency investment environment.
In terms of security empowerment, Summit AscendEX is based on a logically rigorous and efficient trading system. In addition to the sensitive and stable transaction matching system, the comprehensive risk control system always protects the safety of user assets and system operation, and strives to ensure the safety goal of "zero downtime".
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Peak AscendEX contract trading "keywords"
1. Contract leverage
Through reasonable leverage settings, users only need to use part of the total transaction funds to open contract positions corresponding to the total transaction amount, which is different from spot transactions where all their own funds must be used to participate in the transaction. However, it should be noted that although the leverage effect can be used to achieve "small and large" assets, the risks involved are likely to increase exponentially.
2. Mark price, index price
The position profit and loss of the contract account is calculated based on the marked price, while the index price is used to calculate the account assets and serve as the price basis for forced liquidation. Among them, the index price is comprehensively extracted from the spot prices of Binance, Huobi, OKEx, Poloniex, and Dingfeng AscendEX trading platforms. At the same time, the highest and lowest prices are removed and then the average is taken to avoid adverse effects that may be caused by a single point of failure on the platform.
3. Contract Margin
To open a position in a perpetual contract, the user needs to transfer assets in the contract account as a margin (supporting currencies are available). The contract margin will be used to calculate the margin rate of the account, thereby determining the openable ratio of the leverage and the benchmark for the forced liquidation of the position.
4. Funding rate
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risk warning
AscendEX (asdx.io) solemnly reminds that users need to complete risk assessment according to their actual situation before investing, and make rational and prudent investments within the acceptable range. In addition, if you choose to participate in contract transactions, please be sure to pay attention to the choice of trading platform, and beware of asset losses caused by human factors
