What Are Perpetuals?
Perpetuals are futures contracts without an expiry date. As a type of derivative assets, they allow traders to speculate on the price of an asset, such as BTC, without owning it. Unlike traditional futures contracts, which require settlement on a specific date, perpetual futures crypto contracts can be held indefinitely. This flexibility makes them popular among traders looking for continuous market exposure without the need to roll over positions.
The concept of perpetual futures was first introduced by BitMEX in 2016, revolutionizing crypto derivatives trading. Perpetual trading operates on a funding rate mechanism that ensures the contract price remains close to the underlying asset's spot market price. This mechanism, along with leverage opportunities, makes perpetual crypto contracts a key instrument in modern trading strategies.
What Are Perpetuals and How Do They Work?
A perpetual contract functions similarly to a standard futures contract but without an expiration date. It relies on a funding rate system, where traders holding long or short positions pay or receive fees periodically, usually every eight hours. If the perpetual contract price is higher than the spot price, long traders pay a funding fee to short traders, incentivizing price alignment.
Additionally, perpetual trading allows traders to use leverage, meaning they can control larger positions with less capital. For example, a trader using 10x leverage can enter a $10,000 position with only $1,000 in margin. However, high leverage also increases liquidation risk if the market moves against the trader's position.
What are the types of Perpetuals?
There are generally two types of perpetual futures contracts, each catering to different trading strategies and risk profiles, including:
Linear Perpetual Contracts: These contracts are denominated and settled in a stable currency, typically a fiat currency or a stablecoin, making them easier for traders to manage their positions. An example is a USDT-denominated perpetual contract for Ethereum.
Inverse Perpetual Contracts: These contracts are settled in the underlying asset, allowing traders to gain exposure to the asset's price movements while using a different currency for margin. For example, a Bitcoin inverse perpetual contract can be settled in Bitcoin, even when margin is posted in USDT.
Perpetuals vs Futures: What's the Difference?
While both futures and perpetuals allow traders to speculate on asset prices, key differences set them apart:
Expiration Date: Traditional futures have a set expiration date, requiring settlement at maturity, whereas perpetual contracts have no expiry date.
Funding Rate: Perpetual contracts use a funding rate mechanism to keep prices aligned with spot markets, while traditional futures do not.
Rolling Over: In futures trading, traders need to roll over contracts when they expire. In perpetual futures trading, there is no need for rollovers.
Market Popularity: Perpetuals dominate crypto derivatives trading due to their convenience and 24/7 market exposure.
Why Are Perpetual Futures Crypto Contracts Popular?
The rise of perpetuals in crypto trading can be attributed to several factors:
Continuous Trading: Since there is no expiry, traders can hold positions indefinitely.
High Leverage: Many exchanges offer leverage up to 125x, increasing market exposure.
Deep Liquidity: Major crypto exchanges facilitate billions in daily trading volume for perpetual contracts.
Price Exposure: Traders can gain exposure to the price of crypto without actually holding it, just like in any other type of derivatives.
What Are the Most Popular Perpetual Contract Trading Platforms?
BitMEX's Perpetual Contract Innovation
BitMEX pioneered the perpetual contract model in 2016, introducing the funding rate mechanism to maintain price parity with the spot market.
Binance's Expanding Perpetual Market
Binance offers multiple perpetual futures crypto contracts with leverage up to 125x, handling billions in daily trading volume.
Bybit's Growth in Perpetual Trading
Bybit has seen over 40% of its total trading volume come from perpetual futures, with peak volumes surpassing $2 billion during high-volatility events.
How to Trade Perpetuals Safely?
Perpetual trading can be highly profitable but also comes with risks. Here are some best practices:
Use Stop-Loss Orders: Set stop-losses to manage risk and prevent large losses.
Understand Funding Rates: Be aware of periodic funding payments when holding positions.
Manage Leverage Wisely: Higher leverage increases both potential profit and risk of liquidation.
Stay Updated on Market Trends: Price movements can be sudden, requiring quick decision-making.
Bottom Line
Perpetual futures crypto contracts offer traders a flexible and efficient way to speculate on asset prices without expiration constraints. The funding rate mechanism ensures that prices stay close to the underlying asset, and high leverage opportunities make them attractive to traders. Understanding what is perpetual trading and how it works is essential for managing risk effectively. Whether you're a beginner or an experienced trader, perpetuals provide a valuable tool for trading derivatives in the crypto market.
