USDT Futures vs. Coin-Based Contracts in Crypto: Which Is Better for Your Trading Strategy?

When involved in futures trading, choosing the right type of futures contract is critical. Among the most common futures contracts available are USDT-margined (USDT Futures) and coin-margined (Coin-Based Futures) contracts. Both of these contracts offer different ways for traders to speculate on the price of cryptocurrencies, but they operate differently and offer distinct advantages and disadvantages.

This article will dive into how USDT futures and coin-based contracts work, explore the key differences between them, and help you determine which is better suited for your trading strategy.

Understanding USDT Futures Contracts

USDT futures contracts are USDT-margined perpetual futures contracts. These contracts are settled and margined using Tether (USDT), a stablecoin pegged to the U.S. dollar. 

This means that all profits, losses, and collateral required to open a position are calculated and held in USDT, not in the cryptocurrency being traded.

How USDT Futures Work

• Trading Pairs: USDT futures contracts allow you to trade various cryptocurrencies (such as Bitcoin, Ethereum, or others) without directly holding the underlying asset. Instead, you use USDT to enter and settle your futures positions.
• Collateral in USDT: Since these contracts are USDT-margined, traders deposit USDT as collateral. If you make a profit, it is paid out in USDT; if you incur a loss, the amount is deducted from your USDT balance.
• No Expiry: USDT futures are usually perpetual, meaning they don’t have an expiration date, allowing traders to hold their positions as long as they maintain sufficient margin to avoid liquidation.

Key Benefits of USDT Futures

1. Stable Collateral: Since USDT is pegged to the U.S. dollar, traders don’t have to worry about fluctuations in their collateral’s value. This stability is a significant advantage when compared to coin-based contracts, where the collateral (cryptocurrency) can fluctuate.
2. Ease of Calculation: Using USDT as collateral makes it easier to calculate profits and losses in a stable, familiar currency (the U.S. dollar), reducing complexity for traders.
3. Lower Volatility Risk: With USDT futures, traders are only exposed to the price volatility of the underlying asset, such as Bitcoin or Ethereum, rather than the collateral itself, which remains stable in value.

Understanding Coin-Based Futures Contracts

In contrast, coin-margined futures contracts (also known as inverse contracts) require traders to use the underlying cryptocurrency itself (e.g., Bitcoin or Ethereum) as collateral. These contracts are settled in the cryptocurrency being traded.

How Coin-Based Contracts Work

• Trading Pairs: Coin-based contracts allow traders to speculate on cryptocurrency prices, but the collateral and settlement are in the coin itself (e.g., if you trade Bitcoin futures, your margin and settlement are in Bitcoin).
• Inverse Collateral: Unlike USDT futures, these contracts are margined and settled in the cryptocurrency being traded. For example, to trade Bitcoin futures, you need to deposit Bitcoin as collateral, and your profits or losses will be calculated and settled in Bitcoin.
• Leverage: Coin-margined contracts also allow leverage, but because the margin is based on the cryptocurrency, the value of your collateral can fluctuate with the coin's price.

Key Benefits of Coin-Based Futures

1. Maximized Crypto Exposure: Coin-based contracts are ideal for traders looking to maximize their exposure to cryptocurrency prices. If the price of the collateralized coin rises, both the contract's value and your collateral increase, amplifying potential gains.
2. Hedging Strategies: For traders who already hold large amounts of cryptocurrency and want to hedge their positions without converting to USDT, coin-margined futures provide a way to maintain exposure while managing risk.
3. Profits in Cryptocurrency: Since profits are paid in the underlying cryptocurrency, these contracts are popular with traders who prefer accumulating more crypto assets rather than stablecoins.

Comparing USDT Futures and Coin-Based Futures

While both USDT futures and coin-margined contracts allow traders to speculate on cryptocurrency prices, they differ significantly in terms of how they handle margin, collateral, and profit calculations. Below are the key points of comparison:

1. Collateral and Risk Exposure

• USDT Futures: Since USDT is a stablecoin pegged to the U.S. dollar, the value of your collateral remains stable, mitigating risks associated with collateral fluctuations. You’re only exposed to the price movement of the asset you’re trading.
• Coin-Based Futures: Inverse contracts involve higher risk because your collateral (cryptocurrency) fluctuates in value. If the price of Bitcoin drops sharply, your collateral's value decreases, increasing the likelihood of liquidation, even if the market moves in your favor later.

2. Profit and Loss Calculation

• USDT Futures: Profits and losses are easy to calculate and are settled in USDT. This makes it straightforward for traders to understand their account balance, especially in a volatile market.
• Coin-Based Futures: Profits and losses are calculated and paid out in the underlying cryptocurrency. While this can result in higher gains if the coin’s price appreciates, it also means that your gains could be worth less if the coin depreciates after the trade.

3. Volatility

• USDT Futures: By using a stablecoin as collateral, USDT futures reduce volatility risk. This allows traders to focus on the price movement of the traded asset without worrying about the collateral value changing.
• Coin-Based Futures: These contracts inherently have more volatility risk because both the contract value and the collateral fluctuate with the cryptocurrency market. This double exposure can result in greater profits or losses, depending on market conditions.

Conclusion

Choosing between USDT futures and coin-based futures comes down to your trading strategy, risk tolerance, and goals.

For traders who prioritize stability and want to avoid collateral fluctuations, USDT futures provide a clear advantage. They offer a straightforward way to calculate profits and losses, with the stability of using a dollar-pegged stablecoin as collateral.

On the other hand, coin-based contracts are ideal for traders looking to maximize their exposure to the crypto market, particularly those who are already holding large amounts of cryptocurrency and prefer to increase their crypto holdings rather than stablecoins.

Both types of contracts offer their own benefits, and understanding how they work will help you choose the one that best aligns with your trading objectives.

Read more:

Trade Ethereum (ETH) Futures

Trade Bitcoin (BTC) Futures

Trade Bitcoin (BTC) Futures

Trade XRP Futures

Frequently Asked Questions (FAQs)

1. What is the main difference between USDT futures and coin-based futures?
The primary difference is in the collateral. USDT futures use the stablecoin USDT for margin and settlement, while coin-based futures use the cryptocurrency being traded (e.g., Bitcoin) as collateral.

2. Which type of contract is better for beginner traders?
USDT futures are often better for beginners because they offer stability in collateral and make profit and loss calculations easier, as everything is settled in USDT, which is pegged to the U.S. dollar.

3. Why would someone choose coin-based futures over USDT futures?
Coin-based futures are preferred by traders who want to maximize their exposure to the cryptocurrency market. Since profits are paid in the underlying cryptocurrency, these contracts can be more beneficial for traders who want to accumulate more crypto rather than stablecoins.

Investor Caution 

While the crypto hype has been exciting, remember that the crypto space can be volatile. Always conduct your research, assess your risk tolerance, and consider the long-term potential of any investment.

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