Understanding Perpetual Futures Contracts in Cryptocurrency

Do you want to understand the concept of perpetual futures contracts in the cryptocurrency field? This article provides all the information you need to know about perpetual futures and how they can benefit your cryptocurrency investments. As a cryptocurrency investor, understanding and utilizing different investment strategies is crucial for success. Through this guide, you will gain an in-depth understanding of the basics of cryptocurrency perpetual futures, their structure, and their advantages compared to other forms of contract trading. So, buckle up as we explore what makes perpetual futures so attractive in the world of cryptocurrency!

What is a Perpetual Futures Contract?

A futures contract is an agreement between two parties to buy or sell an asset at a predetermined price and future date. These assets range from commodities like gold or oil to financial instruments like cryptocurrencies or stocks. This type of contract is a powerful tool for preventing potential losses and securing profits.

A perpetual futures contract is a type of derivative that allows traders to speculate on the future price of an asset without actually owning the underlying asset. Unlike regular futures contracts with fixed expiration dates, perpetual futures contracts do not expire. This means that traders can hold positions indefinitely, taking advantage of long-term market trends and potentially earning substantial profits. Additionally, perpetual futures contracts typically feature unique mechanisms like funding rates, which help keep their prices aligned with the underlying asset.

Perpetual contracts have no settlement period. As long as you have sufficient margin to maintain the trade, you can hold a position indefinitely. For example, if you buy a BTC/USDT perpetual contract at $30,000, you are not constrained by any contract expiration time. You can close the trade when needed to secure your profits (or accept losses). Although perpetual futures trading is not allowed in the U.S., the market for perpetual futures is enormous, with nearly 75% of global cryptocurrency trading conducted in perpetual futures last year.

Overall, perpetual futures contracts are a useful tool for traders seeking exposure to the cryptocurrency market, but they also carry significant risks and should be used cautiously.

Key Features of Perpetual Futures Trading

Many traders choose perpetual futures trading for more flexible trading methods and greater leverage freedom. Understanding the main features of perpetual futures trading is essential as it becomes increasingly popular in the market.

Initial Margin

The initial margin is the amount of funds traders use to secure their positions and is necessary to enter the perpetual futures market. One notable feature of perpetual futures trading is the very low initial margin requirement, which attracts many traders. Typically, the initial margin only needs to be a certain percentage of the trade contract's price, and the proportion offered varies across platforms.

Maintenance Margin

The maintenance margin is the minimum amount of equity that must be maintained in a trader's existing positions to offset any losses. This process is automatic in perpetual futures trading and usually requires a higher margin than the initial margin. The maintenance margin is not fixed and fluctuates with price changes. When the contract prices move in different directions, the maintenance margin will adjust accordingly. If it fails to meet the required levels, traders need to add more margin, or they will face forced liquidation.

Liquidation

Liquidation in perpetual futures trading refers to closing a contract by establishing an offsetting position when the traded commodity does not reach the expected profit set by the investor. The benefit of this is that it allows investors to cut losses in time and reduce the risk of trading losses. However, the timing and method of liquidation are also crucial; incorrect liquidation operations can further increase trading losses. Therefore, before executing a liquidation operation in perpetual futures trading, investors should make accurate judgments and reasonable decisions based on their investment strategies and market trends.

Funding Rate

The funding rate is a mechanism to ensure that the price of perpetual contracts reflects the underlying Bitcoin price. When the funding rate is positive, long positions pay short positions, and when negative, short positions pay long positions. Understanding the funding rate is crucial as it affects investors' profits and losses, making it essential to closely monitor the funding rate when trading perpetual futures (such as perpetual Bitcoin futures and perpetual Ethereum futures).

Mark Price

The mark price is the fair value price of an asset, estimated by considering the bid and ask prices from various trading platforms. This price helps prevent market manipulation by ensuring that the futures contract price aligns with the underlying asset price. If the market price of a cryptocurrency changes, the futures contract's mark price will also adjust accordingly, aiding in more accurate trading decisions.

PnL

PnL stands for "Profit and Loss," a way to measure the potential gains or losses a trader might experience when buying and selling perpetual futures contracts (such as perpetual Bitcoin or Ethereum contracts). Essentially, PnL is calculated by the difference between the entry and exit prices of the trade, considering any associated fees or financing costs.

Insurance Fund

The insurance fund in perpetual contracts acts as a safety pool, helping to protect traders from potential losses due to sudden market fluctuations. In other words, if the market unexpectedly drops, the insurance fund provides a buffer to help cover any losses, preventing traders from having to liquidate positions. In a volatile and unpredictable market, it serves as an important safety net and is one way perpetual futures trading evolves to meet user needs.

Auto-Deleveraging

Auto-deleveraging is essentially a risk management mechanism that ensures positions are closed when the margin is insufficient. Simply put, this means if a trader's position moves against them and their margin balance falls below the required maintenance, the cryptocurrency derivatives exchange will automatically de-leverage their position. While this might seem unfavorable, it is a precaution to prevent traders from losing more funds than they can afford. For anyone trading perpetual futures (such as perpetual Bitcoin or Ethereum contracts), understanding how auto-deleveraging impacts their positions and using this knowledge to evaluate and improve their risk management strategy is important.

How Do Perpetual Contracts Work?

Let’s understand how perpetual contracts work with a hypothetical example. Suppose a trader holds some BTC. When they buy a contract, they either want this amount to stay consistent with the BTC/USDT price or move in the opposite direction when they sell the contract. Considering each contract is worth $1, if they buy a contract at $50.50, they must pay $1 worth of BTC. Conversely, if they sell the contract, they will receive $1 worth of BTC at the sale price (if they sell before buying, this still applies).

It’s crucial to note that traders are buying the contract, not BTC or USD. So, why would you trade cryptocurrency perpetual futures? And how do you ensure the contract price follows the BTC/USDT price?

The answer lies in the funding mechanism. Long position users receive funding fees (compensated by short position users) when the contract price is below the BTC price, incentivizing them to buy contracts, pushing the contract price up and realigning it with the BTC price. Similarly, users holding short positions can buy contracts to close positions, potentially causing the contract price to rise to match the BTC price.

Conversely, when the contract price is higher than the BTC price, long position users pay fees to short position users, encouraging sellers to sell contracts, thereby bringing the price closer to the Bitcoin price. The difference between the contract price and the BTC price determines how much funding rate traders will receive or pay.

Differences Between Perpetual Contracts and Traditional Futures Contracts

Perpetual contracts differ from traditional futures contracts in trading methods and terms. Perpetual contracts are permanent and do not expire, allowing indefinite holding. Traditional futures contracts must be settled or delivered at expiration. Additionally, perpetual contracts use funding rates to adjust to the index price, enabling traders to trade within narrower spreads, providing more flexible risk control. Perpetual contracts may be a better choice for those seeking more freedom and flexibility, while traditional futures contracts suit traders needing higher security and assurance.

Differences Between Perpetual Contracts and Leverage Trading

• Cryptocurrency perpetual contracts and leverage trading are both methods for traders to increase their positions in the cryptocurrency market, but there are key differences.
• Time Frame: Cryptocurrency perpetual contracts have no expiration date, while leverage trading is typically conducted within a shorter time frame, where traders borrow to open positions within a specific period.
• Settlement: Cryptocurrency perpetual contracts settle based on the index price of the underlying cryptocurrency, while leverage trading settles based on the price of the cryptocurrency when the trader closes the position.
• Leverage: Both allow the use of leverage, but perpetual contracts often offer higher leverage multiples, increasing potential profits and risks.
• Fees: Perpetual contracts usually charge funding fees for holding positions long-term, while leverage trading requires paying interest on borrowed funds.
• Collateral: Perpetual contracts require traders to deposit a certain amount of cryptocurrency as collateral to open positions, whereas leverage trading requires depositing funds as collateral.

How to Trade Futures Contracts on Venkate?

At Venkate cryptocurrency derivatives exchange, we offer Bitcoin futures trading through two flagship products: perpetual Bitcoin futures and quarterly Bitcoin futures. The main differences between these contracts are expiration and funding fees.

Trading cryptocurrency derivative contracts on Venkate futures is straightforward for all traders. If you are already a user, follow these steps to get started:

1. Open a Futures Trading Account: Enable 2FA verification, fund your futures account, and start trading.
2. Deposit Funds: Deposit funds into your futures wallet, which supports various cryptocurrencies, including USDT.
3. Choose Between Two Types of Derivative Contracts on Venkate Futures: USD-margined contracts and coin-margined contracts.
4. Select the Appropriate Leverage for Your Position.
5. Place Orders: Choose from a range of available options, such as limit buy, market buy, etc.
6. Trade Live with Zero Risk: Venkate contracts provide a dedicated simulated trading environment for users to learn and enhance their skills. Join the world of cryptocurrency derivative contracts and sign up for Venkate contracts now!