Bitcoin Bandwagoning: An Examination of Institutional Investment in Crypto
Chapter I: Introduction to OKEx Futures/Swap Contracts
When it comes to derivatives trading, we usually refer to the trading of a contract between the buyer, who agrees to purchase an asset at a price on a set date, and the seller, who agrees to deliver the asset at the same price on such date. The predetermined price at which both parties agree to buy and sell the asset is called the forward price. The future date on which the delivery and payment will occur is known as the expiry date. The asset which both parties agree to transact is called the underlying asset.
You can open long or open short to gain from the rise or fall of the underlying asset price, offset risks via hedging, or adopt arbitrage strategies to make profits.
We adopt a cash settlement approach to settle crypto contracts. Upon expiry, our system liquidates positions based on the arithmetic average price of the index price in the hour prior to settlement, instead of by way of physical delivery. We also offer perpetual swap without expiry dates.
In general, the difference between futures and perpetual swap is the availability of contract expiry date. To go further, our futures and perpetual swap contracts are categorized by the type of margin, namely USDT-margined and coin-margined.
Our futures contracts are settled on fixed expiry dates. We currently offer weekly, bi-weekly, quarterly and bi-quarterly futures contracts. If a futures contract reaches its expiry date, our system will settle it at 08:00 (UTC) on Friday of the expiry week by way of non-physical cash settlement. The position will be closed at the same time. The unrealized profit and loss (UPL) derived from settlement will be recorded as realized profit and loss (RPL), which will be credited into your account balance.
B. Perpetual swap:
Perpetual swap contracts have no delivery and expiry dates. As they don’t expire, a funding mechanism is adopted to anchor the perpetual swap price to the spot price.
A funding fee is exchanged every 8 hours at 00:00, 08:00 and 16:00 (UTC) every day. If you close your position prior to the funding time, you will not need to pay nor receive funding fees.
Funding fee = position value * current funding rate (The funding rate is determined by the difference between the contract price and the spot index price during the last settlement period.)
When the funding rate is positive, the longs pay the shorts. When it is negative, the shorts pay the longs. (OKEx does not charge any fees in the funding process. Funding fees are exchanged directly between counterparties.)
C. Coin-margined futures (inverse futures)
A coin-margined futures contract is settled in the underlying cryptocurrency. Its underlying asset is the USD index of the underlying cryptocurrency (for example, the underlying asset of a BTC contract is the BTC/USD index). The face value of all contracts is in US Dollar. For example, the face value of a BTC contract is 100 USD. For contracts of ETH, EOS and other crypto assets, the face value is 10 USD.
It can be used as a hedging tool to offset exposure on the assets held. Also, long traders can gain from the rise in the underlying cryptocurrency price.
D. USDT-margined futures (linear futures)
An USDT-margined futures contract is settled in USDT. Its underlying asset is the USDT index of the underlying cryptocurrency (for example, the underlying asset of a BTC contract is the BTC/USDT index). The face value of a contract is in the unit of its underlying asset. For example, the face value of a BTC contract is 0.0001 BTC and ETH is 0.001 ETH.
Since the contracts are margined in USDT, you can flexibly allocate the margins between different contracts without worrying about the price fluctuation of the underlying assets. What’s more, the profit and loss calculation of USDT-margined futures is much easier, saving you from extra hassle.