Investing in DeFi Index Futures can be a useful tool for portfolio diversification or hedging.
Trading in the cryptocurrency industry can be simultaneously difficult and exciting. Traders need to tap into an immense depth of knowledge and make split-second decisions. Not only should traders learn about the cryptocurrencies they are trading with, but they should also study how the market operates and reacts to up and downtrends. Beyond that, trading can be incredibly complicated itself due to the many options that exchanges like Binance provide.
Since 2020, a year after Binance and Paxos created BUSD, Binance has begun expanding its role in the DeFi world. Now that Binance allows its users to participate in the world of DeFi via BUSD, another piece of the trading puzzle has been revealed.
What are DEFI Index Futures?
Futures trading on Binance is a vast landscape with many options to trade. As more and more people have joined the DeFi world via Binance, the entire ecosystem has flourished, offering new assets to trade with. DeFi index futures are tradable assets offered on Binance under the USDT-margined perpetual futures product line.
To further understand this, it’s useful to know what an index is. An index is a tool used to track an asset or group of assets’ performance. The measurement is taken to replicate the actions of a specific segment of the market. Thus, the DeFi index is designed to track the overall DeFi performance of cryptocurrencies available on Binance. Its value is calculated with a weighted average price of its components. These sorts of futures trades consider variations that reflect the conditions of market capitalization and volume.
Some of the DeFi protocols weighted into DeFi index futures include BAND Protocol, Compound, Kava.io, Aave, Chainlink, Kyber Network, Maker, Swipe, Synthetic Network Token and 0x.
Under extreme circumstances such as a delisting or a significant drop in organic volume, Binance makes adjustments that recalculate the weight of the market segment. Binance also makes adjustments whenever there is a hard fork, airdrop, or mapping.
Benefits of Trading DEFI Index Futures
Much like trading with non-traditional crypto derivatives like COIN-Margined Futures, USDT/BUSD-Margined Futures, and multi-asset futures, there are explicit benefits inherent to DeFi Index Futures too. Not only do DeFi Index Futures offer a distinct capital efficiency, they are incredibly useful for a handful of other reasons shown below.
1. Asset Allocation
Instead of holding or investing into a broad portfolio and using multiple contracts to cover a range of assets, traders can allocate a sizeable portion of their portfolio into Binance’s DeFi Index Futures. Since the index measures, weighs and values over ten decentralized finance assets, the segment becomes a varied, nuanced and more balanced asset. Traders can balance risk by dedicating their portfolio's assets to capture Binance’s full spectrum of investment opportunities in the DeFi sector.
2. Performance Measurement
DeFi Index Futures offer traders new information for analysis. Since an index tries to recreate multiple pieces of the market segment, the performance of multiple assets has a new effect on asset allocations. Instead of tracking the performance of a singular cryptocurrency like Bitcoin, where volatility is highly present and uncertainty in price action is common, the performance of a synthesized index segment provides a typically less volatile experience. Traders also have a better time targeting investment mandates with DeFi Index Futures than other cryptocurrency trading options.
3. Hedging or Diversification
Hedging against risk using a USDT DeFi perpetual contract is more efficient than with other hedging options. When long-term investors with DeFi tokens use the index as a short hedge to reduce price volatility, they are often rewarded by capital efficiency native in these perpetual contracts. Traders can also diversify their investments by allocating their capital across the range of DeFi tokens Binance offers. Investing in these weighted assets can be cheaper and more efficient because of the sometimes superior performance in the index.
4. Short-term and Momentum Trading
Since DeFi is a growing market, DeFi Index Futures can represent exciting trading opportunities for short and long-term traders. With DeFi Index Futures, traders can capture short-term trends for flexible and reactive strategies making these contracts excellent for market conditions that change often. Due to the available 50x leverage, traders can maximize on relatively small price movements and create profits like any other form of derivatives trading.
How to Trade Index Futures?
Traders can start trading DeFi Index Futures by first finding an exchange that supports the DeFi projects they are comfortable with and believe in. Binance offers a DeFi Index segment that supports around ten specific projects that are all growing and changing in their own time. Traders can start trading this sort of asset (on Binance) without needing to worry about expiration dates (perpetual contracts), funding rates that diverge in prices between the index and perpetual contract markets, or settlement as these contracts are settled in USD.
For those interested in getting started with DeFi Index Futures (DEFIUSDT), the min/max contract size is set at 0.001/10,000. Leverage can be set at up to 50x, and the base initial margin rate is 2% (maintenance margin rate at half that). The liquidation fee is 0.75%.
Spread trading example: (Short DEFI index, Long LUNAUSDT perpetual)
Users can set up trades with DeFi Index Futures that cover spreads. For example, traders can open a short position on an entire DeFi index, but at the same time can open a long, perpetual contract for an individual DeFi asset like LUNAUSDT. So long as the trader is utilizing USDT to open and settle their positions, the index and the projects included within it can all be traded in conjunction with one another.
This is excellent for traders in the DeFi industry who expect one project or asset to perform better or worse than other index projects. The ability to hedge against a piece of an index can allow for a stronger portfolio performance over time.
Conclusion
As with any form of trading, it’s important to remember the fundamentals. Although DeFi Index Futures can afford a trader more stability and efficiency when trading thanks to coverage over an entire market segment, derivatives trading in any form is still highly risky. The risk/reward ratio in any futures trading asset should be accounted for before beginning to trade.
For more guidance material on how to trade responsibly and derivatives contracts available on Binance, head over to Binance Academy. To begin trading, set up an account at Binance.com, and get going. Best of luck, and trade responsibly!
Read the following support items for more information:
(Support) What Is Multi-Assets Mode
And many more Binance Futures FAQ topics...
