Perpetual futures contracts are a type of derivative contract that allow traders to speculate on the price of cryptocurrencies without expiry. Unlike traditional futures contracts, perpetual futures contracts do not have an expiration date, and instead work on a funding rate that is paid between long and short traders. In this article, we will discuss what perpetual futures contracts are and how to trade them in the crypto market.
What are Perpetual Futures Contracts?
Perpetual futures contracts are a type of derivative instrument that allows traders to speculate on the price of cryptocurrencies without an expiry date. Unlike traditional futures contracts, perpetual futures contracts are settled on a daily basis, and the contracts are automatically rolled over, meaning they never expire. This type of futures contract is especially popular among traders who want to take advantage of short-term price movements without having to worry about the contract expiring.
Perpetual futures contracts are typically traded on cryptocurrency exchanges and are denominated in the underlying cryptocurrency. For example, a trader could buy a Bitcoin perpetual futures contract, which is denominated in Bitcoin, with the aim of making a profit should the price of Bitcoin go up.
The key feature of perpetual futures contracts is the funding rate. The funding rate is the fee that is paid between long and short traders. The funding rate is calculated by taking the fair value of the perpetual futures contract, which is based on the underlying index price, and subtracting the mark price.
How to Trade Perpetual Futures Contracts in Crypto
For traders who want to take advantage of the opportunities offered by perpetual futures contracts, the process is relatively straightforward. Traders can access perpetual futures contracts on a number of exchanges, including BitMEX, FTX, and Binance. When trading perpetual futures, traders must first deposit the underlying cryptocurrency into their exchange wallet, and then they can buy or sell a perpetual futures contract with the aim of profiting from price movements.
Traders should be aware that the leverage available on perpetual futures contracts can be high, which can result in significant losses should the price move against the position. As such, traders should use caution when trading perpetual futures contracts and make sure to use a risk management strategy.
Traders should also be aware that the liquidity of perpetual futures contracts can vary depending on the exchange. As such, it is important to check the order book before entering into a position, as it will provide an indication of the depth of liquidity on the exchange.