Beware of Binance Futures Cross Collateral System: It Will Trap Your BTC Collateral
I’ve been really curious about how high-performing the Binance Futures have been in the market.
They regularly are in the top 3 these days on Bitcoin:Dollar volume:
One of the features of Binance Futures is that they are linear and require USDT collateral to trade. So it’s a zero-sum game between tether holders who are longing and shorting various crypto pairs.
This is a contrast to the popular BitMEX, Deribit, Huobi contracts which are inverse and require crypto collateral. However, traditional futures are indeed linear so Binance’s approach is more intuitive for many.
LTV: Loan To Value ratio
The problem is a lot of people don’t want to deal with USDT. They want to just use bitcoin. So a hacky way around this for Binance was to let people pledge bitcoin in the “Futures Wallet” and borrow USDT at 70% LTV. It is quite attractive when they make this offer at 0% interest rate, so I investigated it a bit further.
LTV is Loan-to-Value, it is the ratio at which Binance is willing to issue a loan against the value of the collateral that you provide, i.e., (Loan Amount in USDT / Collateral Value at Market in USDT):
The numerator of the above is fixed, it’s the USDT you borrow. The denominator adjusts in realtime along with BTC’s market price. So your LTV ratio is adjusting as the BTC market fluctuates.
Let’s Trade Binance Futures Cross-Collateral!
Let’s assume that BTC spot price is $7,000. At 70%, Binance is willing to lend you 4,900 USDT per Bitcoin at current market rates. You can then use the 4,900 USDT to trade in the various Binance Futures products. Cool enough, right?
Wrong.
What if you traded a bit, shorted bitcoin, and price went up to $9,000. You lost the 4,900 USDT actually. So you’re not interested in trading and you’d rather try your luck another time. Luckily your 1 BTC is now worth $9,000 so even though you lost the 4,900 USDT, you now have a LTV of 4,900 USDT/$9,000 = 54.44%.
Surely you can just liquidate 0.544 BTC and repay the loan and you’ll have 0.456 BTC ($4,100) left?
Collateral Frozen at Initial LTV of 70%
You would think so, but not so fast — you can bring your LTV down by adding more BTC, but you can only “Adjust your LTV” upwards (removing frozen BTC collateral with brings down V and increases LTV) up to your initial LTV:
Since the initial LTV is 70%, if BTC price jumps, you can only remove frozen BTC until you are at LTV 70% again. And if you have lost any of the loan from trading, you have to find another source of USDT to repay the loan. Your frozen collateral can not be used to repay, even though it is clearly sufficient to cover the balance of the loan.
At 80% LTV you get a “margin call” where they warn you to top up the collateral to bring down LTV ratio (remember, denominator is the BTC collateral and if BTC price falls you need to add more to make the ratio drop).
At 90% LTV the system will finally sell the BTC collateral into USDT to repay the loan and credit you with whatever USDT (or collateral) is remaining afterward:
This means that the BTC you pledged as collateral for the USDT loan is frozen — stuck, you just can’t get it out. Any attempt to raise the LTV above 70% by removing collateral is met with an error:
Despite the fact that your collateral of 1 BTC is more than covering the 4,900 USDT loan you took out because it is worth $9,000, Binance’s silly little system is not intelligent enough to allow you to liquidate the collateral to repay the loan. Instead you have to go through a convoluted timeconsuming manual process to recover the collateral, and it’s only possible precisely because BTC price has gone up to $9,000.
In this example your 54.44% LTV means you can boost this to 70% LTV and move out 0.2222 BTC worth 2,000 USDT, so that you have 0.7777 BTC worth $7,000, and a LTV of 4,900/7,000 = 0.7 = 70%.
So you have “released” 0.2222 BTC of the 1 BTC you have locked up, but what about the $2,100 worth of BTC above and beyond the loan you owe?
Now you have to go through a series of other steps where you sell the released BTC into USDT (generating fees for Binance) and pay back part of the 4,900 USDT loan, bringing the LTV down, allowing you to move it up again to take out frozen BTC:
In this case, you have to spend a bunch of time just dancing around with the Futures Wallet to adjust LTV, remove BTC, sell into USDT, repay USDT, rinse and repeat three or more times.
However, what happens if you got chopped up and you lost the 4,900 USDT but BTC is still only worth $7,000, rather than $9,000 which gave you more breathing room in the LTV?
Well in this world, your LTV is still 70%, you lost all your USDT borrowed, and so you can’t unfreeze any BTC to sell into USDT to pay off the loan.
Pay Up or Get Liquidated
Despite the excess equity you have on the loan of $2,100, if you don’t have other USDT hanging around to pay back the loan, this 1 BTC you have frozen in the cross-collateral futures wallet is just plain stuck.
That’s right, in the world where BTC went to $9,000 you could wiggle your way around and free up some BTC, then sell into USDT, repay, and go through that cycle a few times. But in this case where BTC ended up at $7,000 after your trading lost the USDT you borrowed, you are simply TRAPPED.
Binance will force you to hold on to the frozen BTC until the BTC price drops enough that your LTV reaches 90% and you get liquidated. Or, if BTC rises and you can then play the wiggle as in the first example.
This may not matter if you are a small trader and the amount is trivial. But if you are a larger trader, doing most of your trading at Binance, beware. You may be on the hook for a USDT loan where you can’t pay it back despite having plenty of collateral. You will be forced to hold frozen BTC until the price moves down enough to get liquidated and you may be able to keep 10% if you’re lucky.
Conclusion
All in all I do not recommend any trader using Binance Futures in general, let alone this sketchy, poorly designed “Cross Collateral” mechanism which is flawed in so many ways.
The fact that they literally copy-and-pasted the documentation from BitMEX shows that they do not have a proper deep understanding of the system they have created.
And after this loan fiasco, so called “cross-collateral” system, it honestly feels like Binance does not know what they are doing in financial engineering terms. This is like they put a loan model which is applicable only in a consumer-to-consumer context on top of a Futures product without thinking at all about how traders would utilise it.
