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As tempting as it can be to buy altcoins using perpetual futures, there are some hidden pitfalls that you should monitor closely.
In recent years, numerous exchanges have begun to offer altcoin futures listed in Tether (USDT) and stablecoin pairs, which eventually became the standard. This change is more convenient for most traders, but still presents some serious problems for those looking to keep long positions open for more than a couple of weeks.
Before opening any trade in an exchange that offers perpetual futures, traders should be aware that stronger wicks can perform stop losses, investors lose the ability to stake their altcoins for lucrative returns, and the variable funding rate can significantly increase the costs of carrying out an exchange.
Lever leads to stronger wicks
Regardless of how liquid a market is, leverage will result in stronger wicks. While these moves don’t usually lead to a forced liquidation, they could cause investors to be arrested.
Therefore, the possibility of incorrect wicks is the main reason that traders should avoid holding positions in futures for longer periods.
Futures settlement engines use a price index made up of multiple spot (regular) trades to avoid price manipulation. Therefore, the system will close positions with insufficient margin only once an index reaches its stops.
Take note of how ETH had a low of $ 326 on Coinbase, while at the same time Binance futures faced a low of $ 302. This change might seem small, but this has certainly triggered traders’ stop orders.
There is a way to avoid such problems, simply by setting the stop order trigger to Mark Price (Index) instead of Last Price.
Making this simple change will avoid liquidation if the futures contracts monetarily decouple from its index. The big problem is that not all exchanges offer this possibility.
Staking and liquidity mining can offer a better return
Buying altcoins using futures does not allow them to be used for staking or lending. For investors looking to hold a long-term position, this is another factor to consider.
There are a number of platforms offering wagering and loan services, including major centralized exchanges. Some of the altcoins that offer 30-day contract annual percentage returns (APY) that can range from 7% to 18% are Polkadot (DOT), Tron (TRX), Cosmos (ATOM) and Cardano (ADA).
Decentralized mining pools (DeFi) are another way to generate income by holding altcoins. Users should be wary of the inherent risks of this industry, especially the loss-making pools occurring between two different cryptocurrencies.
So, opting for a perpetual future, it will not be possible to participate in staking and produce agriculture. It may not affect the decision for those betting on short-term price swings, but it weighs more as the weeks go by.
Beware of fluctuations in funding rates
Perpetual contracts, also known as reverse swaps, have a built-in fee that is usually charged every eight hours. Funding rates ensure that there are no currency risk imbalances. While the open interest for both buyers and sellers is always matched, the leverage can vary.
When (long) buyers are the ones who require more leverage, the funding rate becomes positive. Therefore, those buyers will be the ones who pay the taxes. This problem is especially true during bull run times, when there is usually more demand for longs.
The chart above shows the late-July bull run and it is clear that while Ether (ETH) rose from $ 230 to $ 380, so did its perpetual funding rate. After averaging 1.8% for three weeks, this negatively impacted buyers’ earnings.
Again, it might not be bad for those holding short-term positions, but they add up over the months.
To avoid this gap, one could opt for trading on margin instead of futures contracts. The loan usually costs between 0.5 and 1.4% per month, while the maximum leverage varies from 3x to 10x.
Similar to perpetual futures, investors also need to deposit a margin to access these markets.
It is worth noting that some exchanges will allow users to manually choose rates and set periods for the loan. This method is far superior as it avoids surprises that naturally occur during a heavy buying activity.
While perpetual futures trading is an excellent tool, it has flaws. These include stronger wicks that perform stop losses, the inability to bet and the variable financing rate.
The views and opinions expressed herein are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your research when making a decision.
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