Hedging is a risk management strategy used to offset the risks of a cryptocurrency portfolio. One of the most popular ways to hedge risk is through futures trading, where traders can be both buyers and sellers during volatile markets.
Crypto derivatives platforms like Binance Futures have been actively developing their perpetual futures offering to allow users to hedge existing positions and better control their risk. The Binance Futures platform currently offers 17 perpetual futures contracts as of 10 February, the latest being BNBUSDT.
With its new offerings, Binance Futures has grown considerably and has positioned the platform as the benchmark for traders to hedge their risk. In this article we will reveal 3 reasons why traders prefer Binance Futures for hedging.
1. Lowest taker fees in the industry
In general, trading fees on cryptocurrency exchange platforms are charged according to the types of orders that are sent to the market. These fees are also known as taker fees and maker fees.
Taker fees are charged when you place an order that is executed immediately, whether partially or fully. Traditionally, these orders are known as market orders. Taker fees are higher than maker fees because taker orders are executed immediately, which reduces the liquidity of the order book. Trading fees can vary depending on your activity and trading volume.
At Binance Futures, traders benefit from some of the lowest taker fees in the industry. The basic fee structure charged by Binance Futures is as follows:
Table 1 – Binance Futures Taker Fee Structure
Compared to other crypto derivatives platforms, Binance Futures offers a dynamic fee structure that allows active traders to benefit from low taker fees. Binance Futures offers discounts on taker fees through various marketing campaigns. For example, Binance Futures offers a 10% discount to traders who own Binance Coin (BNB).
Thanks to the combination of low taker fees and real-time tick-by-tick market data that the platform supports, it allows users to discover price developments very quickly. This allows traders to take advantage of hedging or arbitrage opportunities.
With tick by tick market data, Binance Futures releases new data after every trade on the platform instead of every 100 milliseconds. This means that Binance Futures traders can react to price movements more quickly than on other platforms.
The following table shows the breakdown of average daily taker volumes by trading activity:
Category A (CAT A) – accounts that trade less than 10,000 BTC per month
Category B (CAT B) – accounts that trade between 10,000 and 50,000 BTC per month
Category C (CAT C) – accounts that trade between 50,000 and 200,000 BTC per month
Category D (CAT D) – accounts that trade over 200,000 BTC per month
Chart 1 – Distribution of average daily taker volumes between the different volume levels
Chart 1 shows the average daily taker volume traded by different volume levels. Note that the majority of taker volume was generated by CAT C & D traders. On Binance Futures, CAT D traders are the largest, contributing 42.9% of the average daily volume.
Thanks to our dynamic fee structure that rewards traders by trading activity, large CAT D traders enjoy some of the lowest taker fees in the industry.
In bear markets, these large traders are likely to protect their portfolios by hedging in the futures market. To analyse the risk hedging patterns of these large traders, we study the volume taker relative to the maker in relation to price movements in the BTC markets.
Figure 2 – Ratio of taker to maker volume for CAT D
From chart 2, we have observed that the taker/maker volume ratio is multiplied by 2 during the bearish period of December 2019. Prior to that, the taker/maker ratio gradually increased as BTC prices dropped from $9,000 to $6,000. In contrast, the ratio falls below 1 as BTC prices rise back above $8,000.
The increase in the volume taker indicates that large traders were actively hedging their portfolios as price trends changed. Conversely, when markets recovered, traders released their positions.
Transaction costs are an important part of crypto futures trading, especially if you are an active trader. Understanding the different fee structures between cryptocurrency trading platforms can help you save a lot of money on trading fees.
2. Stable & fast matching engine.
To date, Binance Futures’ matching engine is unrivalled – it is the most stable and fastest in the industry.
The matching engine is a fundamental part of any cryptocurrency trading platform, allowing users to process their orders efficiently.
That’s why Binance Futures has put a lot of effort into creating a state-of-the-art matching engine. This has enabled us to deliver a stable and smooth trading experience, as the platform has reached a record daily volume (ATH) of over $3.5 billion in notional value.
The Binance Futures matching engine can handle up to 100,000 orders per second with an average latency of 5 milliseconds. In comparison, other matching engines can only handle 100 orders or less in the same amount of time.
At various times since its inception, the Binance Futures matching engine has been tested in volatile market conditions and difficult price movements. So far, in most cases, the platform has not been affected by sudden volume spikes and has operated smoothly and without delay.
As a result, clients have generally been pleased with the stability and performance of its trading platform. Its ability to handle extreme market volatility has proven to be the ideal platform for cryptocurrency futures for both retail and institutional traders.
3. High liquidity
Apart from its technological advantages, traders also prefer Binance Futures because of the high liquidity of its perpetual markets which allows traders to make trades with ease. Market liquidity is important to traders as it has an impact on transaction costs, a concrete measure of market liquidity is the bid-ask spread.
The bid-ask spread is the price difference between the highest bid and the lowest offer. A wide spread indicates that takers would bear a higher transaction cost, while a tight spread means that makers can trade at lower prices.
Since the beginning of the year, Binance Futures has seen greater liquidity in its BTCUSDT perpetual markets due to increased open interest and daily volumes. Chart 3 shows the bid/ask spread on Binance Futures’ BTC perpetual markets.
Chart 3 – Average daily bid/ask spread in percent
Recently, the bid-ask spread has narrowed to an average of 0.3% over a 24-hour period. This narrowing of the gap is largely attributed to the development of user interest and daily volumes. The increase in the number of market participants results in a deeper order book and narrower spreads. With better liquidity, users are more likely to choose the platform they prefer.
Chart 4 – Average bid-ask spread over 5 minutes, in percent
Binance Futures allows traders to easily and quickly switch between the spot and futures markets. This makes it easier for traders to conduct sophisticated trading strategies such as hedging or arbitrage. In times of high volatility, these traders will switch from the spot market to the futures market to take advantage of market fluctuations. Thus, users can trade with optimal efficiency in both markets due to the high liquidity and ease of moving capital between the cash and futures markets.
The main point
Binance Futures has established itself as the benchmark for risk hedging due to three main factors:
1. Lowest taker fees
2. Stable and fast matching engine
3. High liquidity
It is the preferred channel for many large traders, which was evident during the bear market when taker volume from large accounts increased. The active participation of takers also attracts more makers to the platform, which further adds to the liquidity of Binance Futures’ perpetual markets. With its fast and stable matching engine, Binance Futures offers a smooth trading experience for retail and institutional traders.
