One of the major drawbacks associated with the cryptocurrency is high volatility and price fluctuation. However, traders can get past this limitation using the continuous settlement option of Bitcoin Derivatives. The continuous settlement essentially means you are able to instantly realize profits while containing the high volatility associated with options of periodic funding.
The mechanism behind the working of Bitcoin’s futures contracts is quite simple. You can agree on the price while entering the market even as the contracts will be settled at the end of the given expiry period. For example, if the expiry time of the contract is set in December 2019, the trader can take positions and either buy or sell these futures contracts according to his/her understanding of the future price. That said, the profit/loss will not be realized until the contract expires in December 2019.
This tactic is beneficial for hedging the trader against price fluctuations associated with Bitcoin assets. Traders, for instance, can take short as well as a long position in the market and in a way, this strategy can affect the valuation of assets too. Taking the short position with futures contracts while going to spot market with a long position is a strategy adopted by many traders to pocket more profit. By selling Bitcoin in the spot market, one can significantly enhance the price of futures contracts in the short position, thereby earning more net revenue from the move.
Another innovative option available is Bitcoin perpetual. As the name suggests, perpetual contracts are ones that never expire and provide more control to traders regarding their positions. To keep the price of perpetual in line with Bitcoin, there are primarily two kinds of funding options are utilized – in case of premium value for the perpetual, long positions will pay to short positions as the rate of the funding comes out to be positive; however, in case of discounted perpetual, short positions with pay to the long position as funding rate turns out to be negative.
Unlike futures contracts where one has to wait for the expiry period, here the payment happens typically every eight hours. However, there are a couple of issues associated with the option – first, as the funding interval is well-known in advance, traders who need to pay others could possibly close their positions so as to avoid paying others, and the second issue that one can’t instantly realize the profit available from this option. Also, the changing interest rates at the time of settlement are also a concern for traders.
One of the significant and popular options in perpetual contracts is of continuous settlement. The option of continuous settlement is beneficial in a way that keeps the prices of the contract align with the prices of Bitcoin. This prevents any abnormal activity in the market and the overall adjustment mechanism here is streamline and smoother than other options available in the derivatives domain.
Even more important is that gains accrued to the trader’s account are instantly available, which helps them to open new positions in the market or just withdraw the profit while keeping their position open. The option of the continuous settlement also allows traders to adopt more flexible strategies as any loss can be quickly compensated by the profit position while lowering the risk of liquidation.
Among other innovations in the cryptocurrency trading, the option of continuous settlement is gaining in popularity owing to its unique benefits related to instant settlement, flexible strategy, and less volatility. Traders are finding continuous settlement more innovative and aligned with the nature of digital assets. We expect the popularity of this method to even become more contagious in the future for Plinko as well.