If you are also considering a retreat, then besides the timing of the retreat, perhaps “how to retreat” is also a topic worth contemplating.
(Background: The reason I would never break through a single unit: a trap for liquidity hunted by market makers)
(Background Supplement: Lifesaving Market: Analyzing the Most Peculiar Double Top of 2021 with On-chain Data)
Introduction
For the method of retreating from spot positions, you might think, “Isn’t it just selling directly?” Indeed, selling spot assets is the simplest method of retreat.
However, as a trader, how to avoid leaving any capital idle is a necessary lesson.
This article will share an alternative retreat method: “Shorting with 1x Coin-Settled Perpetual Contracts.”
Shorting with 1x Coin-Settled Perpetual Contracts
Let’s first clarify a few concepts:
Buying Spot = 1x Long
As you might know, the biggest difference between buying spot and trading contracts, aside from transaction costs, is “leverage.” If you simply buy spot, leverage is not involved, so the exposure will be “a 1x long position.”
U-Settled 1x Short Will Liquidate, Coin-Settled Will Not
In theory, leverage multiple x loss percentage = 100% will lead to liquidation (in practice, liquidation occurs when approaching 100%). Therefore, if you use U-settled 1x to short, when the price rises by 100%, you will be liquidated.
However, this is not the case for coin-settled contracts, because the margin (collateral) for coin-settled contracts is “coin.” When the price rises, the value of the margin in the position also increases, hence it will never be liquidated.
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Note: This specifically refers to the “1x leverage” scenario.
After understanding the above concepts, we can start explaining the retreat operation idea:
If we replace “selling spot” with “using spot as collateral to open a 1x short position,” essentially, it is the same.
The principle is simple:
Holding Spot = 1x Long Exposure
Coin-Settled 1x Short = 1x Short Exposure
The two will directly offset each other, which means that no matter how the coin price fluctuates, it won’t affect you, effectively equating to selling.
Some readers might wonder:
What about the unrealized profits or losses while holding the position?
I created a chart illustrating two actual cases; readers who are confused about the calculations can click on the image to view:
Did you notice? Regardless of how the coin price fluctuates afterward, your asset value remains the same.
This is not difficult to understand, because after executing the 1x coin-settled short operation, as mentioned earlier: “the exposure has been offset by our operation,” which is why the asset value remains unaffected by the coin price fluctuations.
Maximizing Capital Efficiency
Some may ask: Why go through this roundabout way? Does it make a difference to just sell the spot directly?
To answer this question, we must mention the concept of “Funding Rate.”
In the perpetual contract market, there exists a mechanism called “Funding Rate”:
– When the funding rate is positive, the long side must pay a certain amount to the short side.
– When the funding rate is negative, the short side must pay a certain amount to the long side.
Thus, compared to selling directly, the method of shorting with 1x coin-settled contracts maximizes capital efficiency for the following reason: this chart shows the historical funding rate of Binance’s $BTC coin-settled perpetual contracts, with green indicating positive and red indicating negative.
Readers should find it easy to notice:
The funding rate is mostly in the positive territory,
This means that as short positions, we can collect additional fees for most of the holding period.
Using Binance’s base fee of 0.01% / 8 hours as a simple interest calculation, this translates to 0.03% profit per day, or 10.95% annually.
Of course, not all periods are positive, so 10.95% may be somewhat exaggerated, but based on the chart, overall, it still yields decent additional profits compared to simply selling spot assets.
Furthermore, for traders like me who “hope to accumulate assets through $BTC over the long term,” retreating in this way feels more reassuring psychologically than selling the $BTC at hand.
Conclusion
In fact, retreating is not limited to just the method of “selling.” If one understands how to utilize various tools in the financial market, it can help us maximize the effectiveness of our capital, allowing money to earn for us at all times!
In addition to the 1x coin-settled perpetual contract shorting, there are also strategies using options for retreat, but the complexity is relatively higher. I hope to share this with everyone when there’s a chance in the future.
That concludes today’s content; I hope you find it helpful. Thank you for reading.
