Why Might a Trader Choose an Inverse Perpetual Contract despite the Added Currency Risk?
A trader might choose an inverse contract if they are already holding the base asset, like BTC, and want to use it directly as collateral without selling it. This allows them to hedge their existing holdings or gain exposure to the asset's price movements.
Furthermore, they can earn more of the base asset if the trade is profitable, which is desirable for long-term holders of the cryptocurrency.
Glossar
Inverse Perpetual Contract
Structure ⎊ An inverse perpetual contract is a type of derivative where the underlying asset itself, such as Bitcoin, serves as the collateral for the position.
Currency Risk
Exposure ⎊ Currency risk, or exchange rate risk, represents the potential for financial loss arising from adverse movements in the exchange rate between two different currencies, a primary concern in global derivatives trading.
Base Asset
Asset ⎊ The base asset serves as the fundamental underlying instrument for a derivative contract, such as a cryptocurrency like Bitcoin or Ethereum.
Currency
Definition ⎊ Currency, in this financial context, represents a medium of exchange, store of value, or unit of account, encompassing both fiat denominations and decentralized digital assets.
Inverse Contracts
Collateral ⎊ Inverse contracts, also known as crypto-margined contracts, utilize the underlying cryptocurrency as collateral for the position.