Stablecoins Becoming Margin Asset of ChoiceAug 19, 2021
A big change is coming about in BTC market structure. In the past two years, futures have become an influential force on BTC’s price discovery. The vast majority of futures open interest was margined by actual BTC as collateral. But as FTX, Binance, and other popular venues started to accept stablecoins as collateral, there’s been a surge of traders migrating from coin margined positions (BTC) to cash margined positions (stablecoins).
The shift became even more visible in recent months as cash margined open interest soared in the aftermath of the May crash. At the same time, coin margined open interest has been trending downwards since Apr. 2021.
The most important implication of this is that longs don’t have the added boost of holding both spot BTC and BTC futures while it goes up, but they’re no longer exposed to deeper losses when their position turns against them (because their margin is in stablecoins, not BTC). For shorts, they can take advantage of downtrends without their margin value eroding, but they lack protection when BTC moves up. When short sellers hold BTC spot as margin and short BTC futures, they have a natural hedge because if the short turns against them, the gain on their spot BTC would offset some of their loss. With cash margined shorts, this is no longer the case.