What are U-based and coin-based contracts

Currently, most centralized exchanges offer two types of perpetual contracts: USD-margined contracts (U本位合约) and COIN-margined contracts (币本位合约). As the names suggest, U-margined contracts are denominated in stablecoins such as USDT, USDC, and BUSD, while coin-margined contracts are settled in the underlying tokens (e.g., BTC, ETH, XRP). Due to different valuation methods, these two types of contracts have their own advantages and disadvantages, as well as more suitable market environments and investment strategies.

Advantages and Disadvantages of U-margined Contracts

Pros:

Simple and Easy to Understand: Stablecoins are pegged 1:1 to the US dollar, making them easier to understand and calculate. For example, when you earn a profit of 100 USDT, you can easily estimate that the profit is approximately 100 USD, and the contract settlement is more intuitive.

Greater Flexibility: You can use stablecoins to open or settle various futures contracts without purchasing the corresponding tokens to fund your futures positions, reducing unnecessary time and transaction costs.

More Stable: Compared to regular tokens, stablecoins maintain a relatively constant value. Therefore, during market volatility, you generally do not need to worry about position value changes caused by fluctuations in their value, which helps reduce risk.

Cons:

Limited Potential Returns: When trading contracts with stablecoins like USDT, you need to allocate part of your assets to USDT. This means that compared to holding tokens with appreciation potential (such as BTC and ETH), the value of USDT is unlikely to change, and your potential gains are nearly zero.

De-peg Risk: The biggest risk of stablecoins is de-pegging. In recent months, several de-pegging events have occurred: for example, in March this year, USDC continued to de-peg following the Silicon Valley Bank bankruptcy; in mid-June, USDT also experienced de-pegging, prompting arbitrage by many traders. Although these stablecoins’ prices returned to normal shortly after the events, de-pegging still has serious negative impacts on contracts and the overall market.

Advantages and Disadvantages of Coin-margined Contracts

Pros:

Potential for Value Gains: Since coin-margined contracts are denominated and settled in the underlying tokens, you can directly participate in the price movements of the tokens. This means that during a bull market or if you are very confident in the token’s future value, you can achieve greater profits through these contracts.

No Need to Hold Stablecoins: For miners or long-term token holders, coin-margined contracts allow them to open positions directly without converting their crypto assets into stablecoins, avoiding unnecessary losses from selling tokens at low prices. Additionally, you do not need to worry about de-pegging risks associated with stablecoins.

Enjoy Exchange Rebates: Holding coin-margined contracts on certain centralized exchanges can earn position rebates, which is very attractive for long-term traders.

Cons:

Volatility Risk: Since coin-margined contracts are denominated and settled in the underlying tokens, traders face the risk of price fluctuations of the base cryptocurrency. If the market experiences sharp volatility, traders may face significant losses.

Higher Entry Barrier: Coin-margined contracts require traders to hold a certain amount of the underlying tokens, which may limit participation for some traders, especially those without large amounts of crypto assets. Also, the pricing calculations are more complex, requiring traders to have a thorough understanding of how the contracts work, margin requirements, leverage ratios, and other related knowledge, which can be unfriendly to beginners.

In Summary

In conclusion, U-margined and coin-margined contracts differ significantly in flexibility, potential returns, and risk levels. You can simply understand that U-margined contracts are more suitable for bear markets due to their lower risk, while coin-margined contracts are better suited for bull markets because you can benefit from the potential appreciation of the tokens. However, the specific choice of contract should also consider your risk tolerance, trading goals, contract terms, and other factors before making a decision. **$HYPE **$HYPER