Perpetual Futures Contracts are an advanced derivative of conventional futures contracts, whereas it does not have any specific expiry date so that buyers and sellers can hold their assets or position as long as they want. Simply put, one can buy the contract when the asset price will be subjected to rise in the future and conversely sell the contract when the asset price is subjected to slump in the future.
Other than that, the trading of perpetual contracts is based on an underlying Index Price. The Index Price consists of the average price of an asset, according to major spot markets and their relative trading volume.
Differences Between Futures Contract and Perpetual Futures Contract
Perpetual Futures Contracts and Futures Contracts are likely similar, but the major difference is Perpetual does not have any expiry dates. What is more, the perpetual futures contract receives funding fees, contrary to the futures contract.
Unique Characteristics of Perpetual Futures Contract
- No Expiry Date: Since a perpetual contract does not have an expiry, it is likely to be considered as Spot-Trading but, with leverage. So, traders can trade nearly at the price of the current market value of the indexed asset, commodity, or crypto.
- Mark Price: It is the estimated price value of the contract, by comparing it with the current trading price. This mark price calculation prevents a futures account from being liquidated while there is huge volatility in the market. Also, mark price plays a huge role in calculating the “unrealized PnL”.
Note: PnL stands for profit and loss, and it can be either realized or unrealized. When you have open positions on a perpetual futures market, your PnL is unrealized, meaning it is still changing in response to market moves. When you close your positions, the unrealized PnL becomes realized PnL (either partially or entirely).
- Dual Price Mechanism: To prevent traders from being victimized to market manipulation, and to ensure a fair trading environment for all our traders.
- Initial Margin: The minimum payable amount to open leverage positions, for instance, if you choose 100:1 leverage to trade 10000USDT then you should pay 100USDT as the initial margin, Whereas the initial margin acts as the collateral of the contracts.
- Maintenance Margin: The minimum amount balance that you must hold in your margin account to keep your trading positions open. Maintenance margin changes based on the market price of the underlying asset. If the market value faces a huge slope then your assets will be liquidated, so that all your current trading positions will be closed. To prevent the account from being liquidated, you would receive a “Margin Call”, and it will ask you to deposit more money into your account to keep all the trading positions open.
- Funding Rate: It is the payment rate between buyers and sellers. When the funding rate is above zero (positive), traders that are long (contract buyers) must pay the ones that are short (contract sellers). Conversely, a negative funding rate means that short positions pay longs. If the futures contract is traded on the premium (above the market price), then the long positions must pay the shorts. In this situation, longs may close their account, and shorts may open new accounts, this may cause a huge price decrease.
- Liquidation: If the maintenance margin drops below the minimum value, then your futures account will come under “Liquidation”. This liquidation limit differs based on an exchange, and the leverage ratio the trader chooses. The additional point here, whenever an account is subjected to be liquidated, then the trader should pay a fee for that. That will also be debited from the futures account. If any funds remain in the futures account after liquidation it will be returned to the user, and if the trader has no value, and he is meant to pay money, then it will be declared as “bankrupt”.
- Insurance Fund: Some exchanges like Binance having this feature in perpetual futures contracts. Insurance funds protect a trader’s futures account from bankrupt when there occurs a liquidation. During the liquidation, traders can pay with insurance funds, if they do not have enough balance, hence traders can prevent the account balance to fall under “0”.
- Auto De-Leveraging: A method of counterparty liquidation that only takes place if the Insurance Fund stops functioning (during specific situations), although unlikely, such an event would require profitable traders to contribute part of their profits to cover the losses of the losing traders. Unfortunately, due to the volatility present in the cryptocurrency markets, and the high leverage offered to clients, it is not possible to fully avoid this possibility. Soulfully, it is a contract prevention mechanism, that can help the traders from huge losses caused by unfair traders.
Our Two ‘Sats’
Perpetual Futures Contracts are the most profitable trading mechanism for the cryptocurrency trading market. By deploying advanced trading tools recommended by any exchanges, and by following unique strategies, one can prevent the futures account to fall under risk.
What's Your Reaction?
A keen researcher who believes in enriching her knowledge. For Shuhada, the crypto world intrigues her sense and offers plenty of high delicious 'crypto cuisines'.