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Author: Dilip Kumar Patairya; Compiled by: Wuzhu, Bitchain Vision
1. What is a reverse futures contract?
A reverse futures contract is a financial arrangement that requires the seller to pay the buyer the difference between the agreed price and the current price when the contract expires.Unlike traditional futures, sellers benefit from falling prices.
Regardless of the underlying cryptocurrency traded, the contract value of the reverse futures contract is denominated in fiat currency (such as USDT) or stablecoins (such as Tether’s USDT).There is an inverse relationship between profit and loss (PnL) and the underlying cryptocurrency price trend.
As a derivative, reverse futures contracts are priced in US dollars and settled/margin using the underlying cryptocurrency.For example, the market price of the BTC/USD pair is determined in US dollars, while profit and margin are calculated in Bitcoin (BTC).
2. How does a reverse futures contract work?
The nature of the reverse futures contract is nonlinear.When traders go long for BTC/USD reverse futures contracts, they are shorting the US dollar.Since the contract is inverse, the trader’s position is lower in Bitcoin, the higher the value of Bitcoin, the higher the value of the US dollar.
To understand how reverse futures contracts work and related calculations, let’s give an example.It involves calculating profits of BTC positions using reverse futures contracts.
The following is a detailed description:
Position size: 1 BTC
Entrance Price (BTC): USD 62,000
Exit Price (BTC): $69,000
The formula for calculating profit is as follows:
This formula uses the difference between the entry and exit prices to determine the profit (or loss) of the underlying cryptocurrency.
Suppose the user is trading a reverse BTC/USD futures contract with a position size of 1-BTC.If the entry price is $62,000 and the exit price is $69,000, the calculation is as follows:
According to the calculation, traders will make 0.00000164 BTC from this transaction, which will appear in their crypto wallets.Those who want to profit from rising asset value sometimes go long, which means they bet on price increases.In the case of reverse contracts, investors who are long positions will benefit from the appreciation of the underlying asset against the US dollar (BTC in this case).
Suppose the investor chooses to go long in reverse contracts linked to BTC/USD.The value of Bitcoin they hold increases in parallel with the price of cryptocurrencies.Therefore, the value of the dollar they hold increases as the price of Bitcoin rises.The price of Bitcoin is directly related to the value of the reverse contract denominated in USD, providing investors with a simple opportunity to profit from favorable market conditions.
3. The difference between forward futures contracts and reverse futures contracts
Linear futures contracts are settled in stablecoins such as USDT, while reverse futures contracts are settled in base cryptocurrencies such as BTC.
In a linear futures contract, traders use and earn the same currency.For example, in a Bitcoin contract denominated in USD, margin and profit and loss are denominated in USD.In linear futures contracts, margin and profit and loss are denominated in quoted currencies, commonly known as “vanilla”.Therefore, Bitcoin vanilla futures contracts denominated in USD are denominated and settled in USD.
In contrast, in reverse futures contracts, traders use base currency (such as Bitcoin) but earn profits and losses in quoted currencies (such as USD).
Comparison of linear futures contracts and reverse futures contracts:
Because linear futures contracts allow traders to settle in stablecoins (such as USDT) across multiple futures markets, it provides flexibility.This simplifies trading operations because there is no need to buy the underlying cryptocurrency to fund futures contracts.
When using stablecoins such as USDT for settlement, it is easy to calculate profits in fiat currency.Traders can easily assess gains or losses with traditional currencies, allowing for better financial planning and analysis.
4. Advantages of reverse futures contracts
Reverse futures contracts help traders build long-term reserves, allowing them to reinvest their earnings in cryptocurrency holdings, provide leverage in bull markets for higher profits, and act as an effective hedging tool without having to put the holdings inConvert to stablecoins such as USDT.
Here are the advantages of reverse futures contracts:
Long-term accumulation
Traders’ profits can be reinvested directly into long-term cryptocurrency holdings through reverse futures contracts, which are priced and settled in cryptocurrencies.It can help miners and long-term holders steadily build their cryptocurrency reserves over time.
Leverage in a bull market
During a bull market, reverse futures contracts can provide traders with leverage, allowing them to increase profits as the value of the underlying cryptocurrency rises.For traders who correctly predict changes in price increases, this leverage can increase profits.
Hedging
Traders can hedge their positions in the futures market by holding and investing in crypto assets at the same time without converting any holdings into stablecoins such as USDT.This improves risk management skills in futures trading, allowing traders to protect against possible losses while maintaining exposure to cryptocurrency markets.
5. Risks related to reverse futures contracts
Cryptocurrency traders engaged in reverse futures contracts must consider liquidity issues, counterparty risks and market volatility.
Market fluctuations
Reverse futures contracts may be extremely susceptible to market volatility, thereby increasing profits and losses.Rapid changes in the price of underlying cryptocurrencies can cause traders to suffer huge losses.
Counterparty risk
Trading platforms or exchanges usually participate in reverse futures contract trading.If the exchange is unable to pay its payables or goes bankrupt, there is a possibility of a counterparty default, which may cause the trader to lose funds.
Liquidity risk
Reverse futures contracts may experience liquidity problems, especially when markets are tight or trading activity is low.Lower liquidity can lead to greater slippage, which can affect overall profitability and make it difficult for traders to complete transactions at the price they want.
