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Huobi Futures

Huobi Insider Recap: Why Trade USDT-margined Swaps on Huobi

At the end of October, Huobi launched a long-awaited product: USDT-margined Swaps.

The product is quoted in USDT and use USDT to calculate profit and loss. It has a linear payoff and has no delivery date; therefore, users could hold positions as long as they want if no liquidation occurs. In addition to gaining profits in a rising or falling market by opening a long or a short position, users could also use it for hedging.

On Nov. 9, 2020, Ciara Sun, Head of Global Business and Markets invited three guests from all over the world to discuss on USDT-margin swaps. The first guest is Siddharth, the founder of Longchain Ltd; the second one is Mike, the CEO of Folkvang Ltd and third one is Michael Safai, the Managing Partner of Dexterity Capital. Let’s see what they are talking.

Featured Q & A

Question 1 from Ciara:

Derivatives trading have opened new doors on the trading of things like Bitcoin and other popular digital assets, but it has also opened an entirely new box of futures trading. Comparing USDT-margined swaps with coin-margined swaps, which one is more cater to the current market needs?

Answer from Siddharth Garg:

I would say the good thing about USDT-margined swaps is you have to take a view only on USDT, from an investment point of view, and then you take trading view on different swaps. Now let’s look at an example, YFV, which has that very high volatility recently, the volatility makes it a very good trading vehicle but it doesn’t make it probably a very good investment vehicle. So, having something like a USDT margin swaps on YFV allows you to trade it without necessarily exposing yourself to the investment risks of investing in YFV. Similarly, you have a lot of traders in the world who do not necessarily believe in cryptocurrencies, but they want to trade cryptocurrencies because of the kind of volatility you have there. So, these are the kinds of traders who can definitely benefit from USDT-margined swaps. Also looking at the number of swaps available right now, I think USDT swaps make a lot more sense right now compared to, say coin-margined swaps, especially for something like DeFi instruments.

Answer from Mike:

I want to add on to that. Those are great answers. I very much agree. On top of that, it’s also very easy to get in and out of different swaps. If your all your collateral is just Tether, it’s very easy to move it around. So, you might have some trading capital and if you’re trading a Bitcoin swap and you want to switch to something else. So, for example, there’s a new DeFi coin, like we’ve seen a lot recently. Literally the only thing you need to do to get started is just move that Tether that you already hold into another wallet. And you don’t actually have to deal with the risk as Sid pointed out, but also the fact of actually converting everything constantly. if you’re trading multiple things at the same time, and you need to manage risk. It’s very easy if the only thing you have is Tether and you can very swiftly move that around as you see fit, especially in these very volatile DeFi coins that we have seen.

Well, what we have also noticed is that the space is getting more professional, and you see a lot of people from traditional finance getting into crypto, and traditionally speaking, like most professionals, they think more in dollar. So, there are a lot more like for example, because all their operating costs are in dollars, traditional investors think in terms of dollar yields and dollar profit. So as such having all the collateral in dollars is just a whole lot easier. Whereas in the old system, if you look at a few years ago, it was really popular in crypto, is that people have Bitcoin and they just wanted to get more Bitcoin. And they also trade other swaps with the sole purpose of accumulating more Bitcoin.

And as a cultural thing, your kind of see that disappearing a little bit, like this is not as popular as it used to be. So, what current people value, including the new professionals, it’s a lot more like a Tether stuff. Yeah, definitely the DeFi crazy scene you see. I a hundred percent agree with Siddarth there. And like, it’s so much easier with all the coins coming out really quickly, and it’s very hard to even get the collateral, like we saw it, File coin, for example. File coin was very interesting because it was very, very hard to get File coin when it just came out, because there was a big demand from borrowers, there’s a big demand from minors as well. We needed it for staking, as such as the spot markets were really, really expensive we say. And having access to use the USDT-based swaps makes a lot of sense.

Question 2 from Ciara:

Based on the data from CryptoCompare, derivatives volumes decreased 17.5% in September to $634.9bn. Do you think the launches of Huobi USDT-margined Swaps in October could bring a new batch of trading volume to reignite the derivatives market?

Answer from Michael:

So, there was definitely a significant decline in September, but I think it was largely due to the success of DeFi, which really blew up over the summer. And you, I know a number of traders who reallocated away from what they were doing normally to kind of, do yield farming or make, you know, kind of a good return in DeFi. That being said, I think, for the reasons that Siddharth and Mike said about how actually these products work, I think it will definitely translate to more volume having USDT-margined swaps available to us. As they said, one of the biggest problems for us is locates. You know, during the summer we really want to trade a lot of these DeFi coins, and we just couldn’t get them.

Dexterity is a market neutral fund. So, we couldn’t buy the coins because we don’t take exposure to things. And if I want to go borrow it and there was very limited availability of these coins and the interest rates were egregious. And so, you know, whenever we think about a strategy, there’s some ROI we make and there’s an interest rate we pay. And if the differential between those two numbers is not big enough, we don’t run the strategy. So not being able to get these locates or not being able to borrow these coins, we just didn’t run a bunch of strategies we really wanted to. With Huobi bringing on USDT-margined swaps, that opens doors for us. That means there are strategies we won’t running a few months ago that we can run now. And that’s definitely going to translate to more volume for Huobi and I think for the entire ecosystem. And I think, you know, Huobi is not the first to offer USDT-margined swaps, but by adding that in, there are now more venues who have that, and that gives us more chances to run market making strategies instead our strategies, and start-up across exchanges which will again, definitely increase volume for dexterity and the ecosystem.

Answer from Siddharth Garg:

Yeah, there are other players in the market which have become pretty big in USDT-margined swaps and Huobi is definitely not the first one, but someone who didn’t have the capabilities to say trade on those platforms would definitely not be able to trade USDT-margined swaps. And as we discussed earlier, there are a lot of traditional traders for whom, USDT-margined swaps might make a lot more sense than coin-margined swaps.

So they could not go to, say, on these other platforms, but they were already there on Huobi, now this opens another avenue for them to trade. And definitely like given the kind of scenario you have right now, USDT-margined swaps make a lot of more sense than coin-margined swaps. And that is effectively going to most likely increase the size of the market overall. Plus, I’m pretty sure Huobi is going to eat into the USDT-margined pie of other players because Huobi itself is such a big player in the market right now.

Question 3 from Ciara:

As we know, both USDT-margined swaps and coin-margined swaps can be used for going short. Could you briefly explain the reason why USDT-margined Swaps could lower the risk of liquidation when going short?

Answer from Mike:

So, I think Michael touched upon this earlier a little bit already. But the basic risk is that if you have a position in a coin-margined swap, so if you trade a BTC/USD coin-margined swap, that means that you, you collateralize your position in Bitcoin. So, you have some Bitcoin in there and you use that as collateral. if Bitcoin goes down, if the price goes down and you already have a short position then you start slowly losing money. So, you start losing your collateral. So, you start slowly to have less and less Bitcoin. But on top of that, the Bitcoin also becomes worthless because Bitcoin is decreasing in price. So you will kind of have a double risk there. And this, this can be very tricky because it’s not really that obvious if you’re trading it like that.

But this is specifically tricky because the position size that you do in coin-margined swap are actually in dollars. So you might, for example, a Bitcoin is $10,000. You might put the 10 Bitcoin in a coin-margined swaps account. You might open a short of a specific size. If it then all comes crashing down, then the 10 Bitcoin is not worth the same money anymore. So, Bitcoin is $10,000 in the beginning, you used to have a hundred thousand dollars’ collateral, then Bitcoin crashes like that slowly evaporates and we’ve seen gone bad, where in March there was a very big sell-off, very big crisis. And I think this is definitely our understanding of most of the events, like a lot of the crash was made worse by very, very bad liquidations in coin-margined swaps. And we saw this on all kinds of exchanges, that was definitely caused a lot of the big sell-off. And yeah, and you don’t have that problem as much, or you don’t have it at all on the USDT-margined swaps for as long as Tether stays stable to a dollar, which as Michael says, basically always kind of it does, you do not have that risk.

Answer from Siddharth Garg:

Yeah. so Mike pretty much touched upon all the points. It’s quite a complicated question to answer, and if you look at different scenarios, what you can come up with is, it is generally more profitable to trade with USDT-margined swaps when the market is going down. But when the market is going up, it’s generally more profitable to trade with coin-margined swaps. But USDT margin swaps definitely decreases the risk immensely when the market is going down. You can do a small profit experiment here suppose you’re trading Bitcoin swaps using Bitcoin as a margin. And you go short in Bitcoin. Now Bitcoin also starts falling, say, it goes to zero. So in the end you will make a lot of Bitcoins, but the value will be zero. So you will, in the end, you will end up making nothing in that case. So yeah, I to take care of these kinds of scenarios, I think USDT-margined swaps are much better to short rather than coin-margined swaps.

Questions from audiences

Question 1: Huobi Futures has achieved significant since the launch of coin-margined swaps in March this year. We’re curious about why Huobi introduces USDT-margined swaps at this time and what is its strategic position in all derivatives products of Huobi.

Answer from Ciara: There are many reasons for introducing USDT-margined swaps at this time. After the plummet on March, 12 this year, almost all cryptocurrencies experienced a large-scale slump and the shorting sentiment was high across the market. Though users could open short in coin-margined swaps trading, they still have to bear the loss from falling token price. However, using stablecoin USDT, an asset that has price stability characteristics, as margin and to calculate the profit and loss, this problem could be avoided. To satisfy the needs of trades and to follow the market trend, we launched USDT-margined swaps. On Huobi, investors can trade various swaps with only USDT, so as to avoid the “best time delay” and the hassle of managing multiple tokens.

When talking about its strategic position, I’d like to say that each of them, coin-margined futures and swaps, USDT-margined swaps, and USDT-quoted options, has their advantages:

Coin-margined futures have four expirations, therefore traders could combine their holdings with the expected price to devise their trading strategies, which are very suitable for miners or hedging users. While coin-margined swaps have no expiration date, meaning users could hold them on as long as they want. For options trading, options buyers could earn profit at a very low cost and have no risk of liquidation. All of these four products and the good word of mouth from our users make what we’re today. Therefore, we’ll continue to upgrade and enrich functions for these products in the follow-up work.

Question 2: Liquidity is a key metric for professional traders. To what extent does Huobi hope to achieve in terms of trading volume and liquidity of USDT-margined swaps? What has Huobi done to attract individual and institutional traders, and to make its trading space more akin to a professional ecosystem?

Answer from Ciara: Indeed, before the launch of USDT-margined swaps, we’re not that competitive in terms of product variety, especially when USDT-margined derivatives are highly demanded. Nevertheless, with its excellent liquidity and risk control capabilities, Huobi Futures has ranked first in the total trading volume for three consecutive quarters this year based on the quarterly reports from TokenInsight. We certainly hope that we can maintain this goal to provide more benefits for Huobi traders.

The USDT-margined Swaps is designed by the original team of Huobi Futures whose core members were all from top investment banks. I’ll briefly introduce its main advantages here and I believe the individual and institutional traders will be attracted due to the following points:

1. Low par value. Take BTC swaps as an example, the face value of each BTC/USDT swaps is 0.001 BTC, which is around 12 USDT; while for BTC/USD swaps, the face value of each contract is 100 USD.

2. Low transaction fee. We will continue to execute the VIP sharing program and market maker preferential policy. During the promotion period, the lowest transaction fee rate for Maker is -0.025% and for Taker is 0.026%, which is the lowest in the market so far.

3. Diversified functions like switchable leverage when holding positions, follow a Maker & Taker are available. Besides, we are the first in the industry that uses a locked margin optimization function. Users who hold both long and short positions for the same asset could enjoy a position margin reduction and therefore lower liquidation risks.

Question 3: According to data from CoinMarketCap, the total market cap of Tether increased from $9.2 billion on July 15 to more tha n $13.7 billion as of September 4, a jump of almost 50%. USDT’s trading volume has surged roughly 150% in Q3. Do you think that Huobi’s launch of USDT-margined Swaps is a good time to increase its share in the derivatives market? What is Huobi’s trump card when facing other platforms who have launched USDT-margined Swaps earlier than Huobi.

Answer from Ciara: We could see from the data that it’s a right time to take advantage of the ever-growing and popularizing stablecoin market through launching USDT-margined swaps and it will sure increase our share in derivatives market in turn.

Though there’re USDT-margined swaps launched in the market already and some of them, like the one from Binance, have gained certain market shares, we still have great confidence in our product either from the product itself or the risk control aspect.

Apart from the advantages we mentioned in the last question, we also have various methods to protect users’ assets, such as cold and hot wallets separation, multi-signatures, anti-DDOS protection systems, which makes us holding a record of zero clawback since the launch in December of 2018.

When talking about the liquidation issue that traders most pay attention to, I’d like to say that we are the first digital asset derivatives exchange in the industry that supports a three-phase liquidation protection mechanism; and no transaction fees will be charged in partial liquidation. Moreover, we use Exponential Moving Average (EMA) as a second reference for forced liquidation.

Compared with other similar products on the derivatives market, we never reduce the positions of profitable users and we promise never to trigger the clawback mechanism as long as the insurance fund is positive.

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