What is the difference between coin-margined contract and perpetual contract?

Coin-margined Contract vs Perpetual Contract

In the world of cryptocurrency trading, understanding the nuances between different contract types is crucial for successful trading. Two prevalent contract types are coin-margined contracts and perpetual contracts. Each contract has its own characteristics and implications for traders. This article aims to shed light on the key differences between these two contract types to help traders make informed decisions.

1. Definition

• Coin-margined contract: A contract that requires the trader to hold the underlying asset itself (e.g., Bitcoin) as collateral for the trade.
• Perpetual contract: A contract that requires the trader to hold a stablecoin, such as Tether (USDT), as collateral.

2. Collateral

• Coin-margined contract: The underlying asset (cryptocurrency) is used as collateral.
• Perpetual contract: A stablecoin is used as collateral, providing stability against price fluctuations of the underlying asset.

3. Funding Mechanism

• Coin-margined contract: The funding rate is calculated based on the interest rate differential between the underlying asset and the stablecoin. The trader pays or receives funding depending on the position held.
• Perpetual contract: The funding rate is determined by the difference between the perpetual contract price and the spot price of the underlying asset. Funding is paid to or received from the exchange.

4. Profit and Loss

• Coin-margined contract: Profit and loss are realized in the underlying asset itself. Fluctuations in the value of the asset directly impact the trader's profit or loss.
• Perpetual contract: Profit and loss are realized in the quoted currency. Fluctuations in the value of the stablecoin used as collateral do not directly impact the trader's profit or loss.

5. Risk and Volatility

• Coin-margined contract: Trading with coin-margined contracts involves higher volatility and risk due to the direct exposure to the underlying asset's price fluctuations.
• Perpetual contract: Trading with perpetual contracts may have lower volatility as the stablecoin collateral provides some stability against price movements of the underlying asset. However, the funding rate can introduce additional risk.

6. Tax Implications

• Coin-margined contract: Tax implications may vary depending on the trader's jurisdiction and the specific asset being traded.
• Perpetual contract: Tax implications may be simpler since the trader deals with a stablecoin as collateral, making it easier to track gains and losses.

Conclusion

Coin-margined contracts and perpetual contracts cater to different trading needs and offer distinct advantages and disadvantages. Traders should carefully consider the characteristics of each contract type and choose the one that best aligns with their trading strategy and risk tolerance.