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Inverse Perpetual vs USDT Perpetual Contracts Compared !?

Written by Sudhir Khatwani

Written by:

Sudhir Khatwani

Sudhir Khatwani holds a bachelor's degree from Vellore Institute of Technology and has made significant contributions as a Programmer Analyst at Cognizant, where he worked on critical projects for leading financial institutions like MUFG and CITI Bank. His technical expertise and analytical skills have been instrumental in delivering high-impact solutions within the financial sector. His expertise in digital assets and blockchain technology was further honed through his previous role as a content strategist for the prominent cryptocurrency exchange, CoinSwitch.

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Last Updated on February 6, 2025

  • The cryptocurrency derivatives market offers a range of contract types, two of the most popular being Inverse Perpetual and USDT Perpetual contracts.

    Both are essential tools for traders looking to profit from market movements without holding physical assets.

    Understanding the nuances between these two contract types is vital for traders aiming to maximize profits while managing risks.

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    What are Perpetual Contracts?

    Perpetual Contracts

     

    Before diving into the specifics of Inverse and USDT perpetual contracts, it’s important to grasp what a perpetual contract is.

    Unlike traditional futures contracts, perpetual contracts have no expiry date, meaning traders can hold their positions indefinitely.

    These contracts are usually settled in cryptocurrency or stablecoins, and they rely on a funding mechanism to keep their prices in line with the spot market.

    What is an Inverse Perpetual Contract?

    Inverse perpetual contracts are contracts in which the margin, profit, and loss are all denominated in the base cryptocurrency. For example, if you are trading BTC/USD, your margin, profits, and losses will all be settled in Bitcoin (BTC).

    Critical Characteristics of Inverse Perpetual Contracts:

    • Denomination in the base cryptocurrency: Inverse perpetual contracts require traders to hold the base cryptocurrency (e.g., BTC or ETH) as collateral, and settlements are made in the same crypto asset.
    • Leverage and Risk Exposure: The value of your collateral is tied to the base cryptocurrency’s price. If the market moves against you, your margin (collateral) value decreases, which can increase your liquidation risk.
    • Ideal for Holding Cryptocurrencies: Inverse contracts are often preferred by traders who already hold the base cryptocurrency and are comfortable with fluctuations in its value.

    For instance, a trader must hold Bitcoin when trading an inverse BTC/USD perpetual contract. If Bitcoin’s price falls, both the value of the collateral and the trading position decrease.

     

    What is a USDT Perpetual Contract?

    USDT perpetual contracts are contracts where the margin, profits, and losses are all denominated in Tether (USDT), a stablecoin pegged to the US dollar.

    These contracts are popular among traders who want to minimize their exposure to crypto volatility by using a stable asset for margin and settlement.

    Critical Characteristics of USDT Perpetual Contracts:

    • Denomination in stablecoin: USDT perpetual contracts use USDT as collateral and for settlements. This allows traders to maintain a steady margin balance without being affected by the volatility of the underlying crypto asset.
    • Stable Leverage and Margin Management: Using a stablecoin like USDT simplifies risk management, as traders don’t need to worry about their collateral value changing due to market fluctuations in the base asset.
    • Ideal for Speculation: These contracts are perfect for traders who want exposure to crypto price movements without holding the actual cryptocurrency or dealing with its inherent volatility.

    For example, in a BTC/USDT perpetual contract, a trader can speculate on Bitcoin’s price movement while using USDT for margin and settlement.

    What is the difference between USDT Perpetual and Inverse?

    Feature Inverse Perpetual Contracts USDT Perpetual Contracts
    Collateral Type Cryptocurrency (e.g., BTC, ETH) Stablecoin (USDT)
    Profit & Loss Denomination Cryptocurrency (e.g., BTC, ETH) USDT
    Price Volatility Exposure High, as the collateral is in crypto Low, since USDT is stable
    Margin Management It is more complex due to crypto price fluctuations It is simpler due to stable USDT value
    Ideal For Long-term crypto holders or speculators Traders seeking stable collateral and ease of management
    Risk of Liquidation Increased during market downturns due to fluctuating collateral value Lower due to stable USDT collateral

    Pros and Cons of Inverse Perpetual Contracts

    Pros:

    • Higher Exposure to Crypto Prices: Traders benefit from directional movements and the increasing value of the base asset.
    • Ideal for Crypto Holders: Those who already hold cryptocurrencies may find it easier to use their assets for margin and settlement.

    Cons:

    • Increased Risk of Liquidation: Since the margin is denominated in a volatile asset, the risk of liquidation increases during downturns.
    • Complex Margin Calculations: The fluctuating collateral value adds complexity to margin management.

     

    Pros and Cons of USDT Perpetual Contracts

    Pros:

    • Stable Collateral: Using USDT as collateral mitigates the risks associated with crypto volatility, making it easier to manage positions.
    • Lower Liquidation Risk: Since the margin is stable, liquidation risk is less tied to price swings in the underlying asset.

    Cons:

    • No Exposure to Cryptocurrency Appreciation: Traders don’t benefit from the increasing value of the underlying crypto asset.
    • Limited to Short-Term Speculation: USDT contracts are better suited for short-term traders looking to profit from price movements rather than long-term holders.

    Which Contract Type is Right for You?

    Choosing between inverse perpetual and USDT perpetual contracts depends on your risk tolerance, trading goals, and preference for managing crypto exposure.

    • If you’re a long-term crypto holder comfortable with volatility and want to maximize your exposure to the base asset’s price movements, inverse perpetual contracts might be more suitable.
    • If you prefer a stable environment with less exposure to crypto price fluctuations and want easier margin management, USDT perpetual contracts provide a more secure and predictable trading experience.

    What is USDC Perpetual?

    USDC perpetual contract functions similarly to a USDT perpetual contract but uses USD Coin (USDC) as the collateral and settlement currency.

    USDC is another stablecoin pegged to the US dollar, offering traders a stable alternative to volatile crypto assets for managing margin and risk while speculating on crypto price movements.

    What is USDT Perpetual?

    USDT perpetual contract is a crypto derivative contract where margin, profits, and losses are calculated in Tether (USDT), a stablecoin pegged to the US dollar.

    These contracts offer traders a stable and predictable environment for trading without worrying about the volatility of the underlying cryptocurrency affecting their collateral value.

     

    Conclusion

    Both inverse perpetual and USDT perpetual contracts offer unique advantages to different types of traders.

    Inverse perpetual contracts connect the underlying asset more deeply, making them attractive to long-term crypto enthusiasts. In contrast, USDT perpetual contracts appeal to those who prefer stability and simplicity in margin management.

    By understanding the critical differences between these contract types, traders can make informed decisions that align with their trading strategies and risk preferences.

    About the Authors

    Sudhir Khatwani holds a bachelor's degree from Vellore Institute of Technology and has made significant contributions as a Programmer Analyst at Cognizant, where he worked on critical projects for leading financial institutions like MUFG and CITI Bank. His technical expertise and analytical skills have been instrumental in delivering high-impact solutions within the financial sector. His expertise in digital assets and blockchain technology was further honed through his previous role as a content strategist for the prominent cryptocurrency exchange, CoinSwitch.