As the market size of digital assets represented by Bitcoin continues to expand, various forms of derivative transactions have gradually emerged in addition to spot transactions as a tool for hedging risks. Among them, the most popular is contract trading. For example, on the EuroEasy platform, perpetual or delivery contracts for nearly 100 currencies have been launched, which can basically meet the trading needs of most investors.
However, for many novice investors, the threshold for contract trading is still relatively high. Many people don’t know what contract trading is, let alone how to operate it. This article will take novice users into the world of contract trading.
1. What is contract trading? What are the risks and benefits?
Contract trading of digital assets refers to the agreement between the buyer and the seller to trade a certain asset at a specified price at a certain time in the future. Contract trading is specifically divided into delivery contract trading, perpetual contract trading and option contract trading. Investors can obtain the benefits of rising digital asset prices through "buy long" contracts, or obtain the benefits of falling digital asset prices through "sell short", or achieve risk avoidance through hedging, or use arbitrage models to earn stable profits.
Contract trading in the digital asset market originated from contract trading in traditional financial markets. Take the soybean contract in the traditional financial market as an example. During the contract transaction, both parties will obtain their respective rights and obligations. For example, if the buyer and seller of the contract trade 10 contracts with a target of one ton of soybeans at a price of 5,000 yuan, then the buyer of the contract will obtain the right and obligation to buy 10 tons of soybeans at a price of 5,000 yuan/ton on a certain day of a certain month. Similarly, the seller also obtains the right and obligation to sell 10 tons of soybeans at a price of 5,000 yuan/ton on a certain day of a certain month. The contract that represents the rights and obligations of both parties is a virtual contract.
In most cases, investors do not actually perform the rights and obligations of the contract, but before the contract takes effect, that is, before the delivery date, they will obtain profits by trading the contract.
The difference between contract trading and spot trading is not only that the contract obtains rights and obligations during the transaction, but also that there is a large gap in returns and risks. Contract trading can magnify the principal through leverage. The leverage ratio is how many times the principal is magnified. The existence of leverage makes the returns and risks of digital assets amplified on the basis of their inherently high investment risks. Compared with spot trading, contract trading is a higher-risk investment behavior. New users need to operate cautiously to control risks after understanding the basic situation of contract trading.
II. Contract Trading Types
EuroEasy contracts can be divided into delivery contracts and perpetual contracts according to whether there is an expiration date. In these two large modules, they can be further divided into U margin contracts and currency-based margin contracts according to the margin type. U margin contracts include USDT margin contracts and USDC margin contracts.
① Delivery Contract
A delivery contract means that both parties of the transaction agree to trade the contract at a specified time, that is, the delivery date, at a specified price. The delivery contract will have a fixed delivery period (currently, OUYI provides four delivery cycles: weekly, biweekly, quarterly, and biquarterly). When the contract reaches its delivery date, the system will deliver it at 16:00 (HKT) on Friday of the week of the expiration date using a non-physical difference delivery mechanism. At that time, the user's position will be closed. The unrealized profit and loss generated after the delivery and closing will be added to the realized profit and loss, and then all realized profits and losses will be settled to the balance.
②Perpetual Contract
Perpetual contract is a new type of contract, which has evolved from continuous contracts in traditional financial markets. Since there is no expiration date, the perpetual contract will use the "funding fee mechanism" to anchor the contract price to the spot price. Funding fees are settled every 8 hours, and the settlement time is 08:00, 16:00 and 24:00 (HKT) every day. Only when holding a position at the above three times, users need to pay or receive funding fees. If the position is closed before the funding settlement time, there is no payment or collection of funding.
Funding = Position Value * Current Funding Rate. (The current funding rate is determined by the difference between the contract price and the spot index price in the previous funding period)
If the current funding rate is positive, longs need to pay funding to shorts; if the current funding rate is negative, shorts need to pay funding to longs. (Funding is charged between users, and the platform does not charge this fee.)
③Coin-based Contracts
Based on the type of margin, coin-based margin contracts are contracts with the underlying asset as the delivery settlement unit. Its contract subject is the US dollar index of the currency (for example, the subject of the BTC contract is the BTC-US dollar index). The contract face value rule: the face value of the contract is a certain US dollar value, BTC is 100USD; ETH, EOS and other currencies are 10USD.
It can be used as a hedging tool for the assets held, or it can enjoy the value increase of the underlying assets and the benefits of the contract when holding long positions.
④U-based contract
U-margin contract is a contract type with U as the delivery settlement unit. Users need to use stablecoin USDT/USDC as collateral. As long as there is USDT/USDC in the account, multiple currencies can be traded, and the profit and loss is settled in USDT/USDC. Its contract subject is the USDT/USDC index of the currency (for example, the subject of the BTC contract is the BTCUSDT/BTCUSDC index). The contract face value rule: the face value of the contract is a certain amount of crypto assets, such as 0.001BTC for BTC and 0.001ETH for ETH.
Because only USDT/USDC is used as margin, margin can be flexibly allocated between contracts, and there is no need to worry about the depreciation risk of the underlying currency. Moreover, the calculation formula is simpler, which is convenient for users to calculate profits and losses.
III. How is contract trading conducted?
1. Users decide on the long and short direction based on their judgment of BTC price trends, and choose the contract type based on the length of time.
The weekly contract refers to the contract that is delivered on the Friday closest to the trading day; the biweekly contract refers to the contract that is delivered on the second Friday closest to the trading day. The quarterly contract refers to the contract whose delivery date is the last Friday of the month closest to the current month in March, June, September, and December, and does not overlap with the delivery date of the weekly/biweekly/monthly contract.
2. Users choose the appropriate price and quantity to trade.
When users purchase contracts, the required margin is the number of BTC equal to the transaction time and contract value divided by the leverage multiple. Only when the account equity is greater than or equal to the amount of margin after the transaction is successful, the user can perform the entrustment operation.
3. Margin
When establishing a contract trading account, users need to select a margin mode. Different margin modes have different trading margin calculation methods and risk control systems. When there are no positions and no pending orders, that is, when the margin of all contracts is 0, users can change the margin mode.
When the full-position margin mode is adopted, the risks and benefits of all positions in the account will be calculated together. Under the full-position margin mode of the unified account, the requirement for opening a position is that the margin rate cannot be lower than 100% after opening a position.
When the position-by-position margin mode is adopted, the two-way positions of each contract will be calculated independently for their margin and benefits. Only when the available margin for opening a position is greater than or equal to the amount of margin required for opening a position, the user can place an order. When the position-by-position margin is adopted, the available margin for opening a position for each contract may be inconsistent.
4. Position
After the transaction is completed, the user holds the corresponding long and short positions.
5. Adjust positions
Users can also adjust positions at any time according to market conditions, lock in profits or stop losses by closing positions, or continue to open positions to increase profits.
6. Delivery
On the delivery date, the open contracts will be delivered and closed at the delivery index at a price of one dollar per point. All profits generated by closing positions will be aggregated to the "realized profit and loss" item of the user's contract account.
7. Liquidation
After liquidation, all realized profits and losses will be aggregated to the account balance.
