Perpetual Futures

What Are Perpetual Futures? 

In May 2016, Bitmex introduced a new type of derivative contract that would significantly impact the crypto industry: perpetual futures. These contracts blend the flexibility of spot trading with the leverage of futures but without an expiration date.

Perpetual futures allow traders to speculate on price movements indefinitely, making them a versatile tool for both hedging and speculation in crypto markets. Unlike traditional futures with set expiry dates, these contracts can be held as long as desired.

Their key features - no expiry and high leverage - make perpetual futures attractive to many traders. However, they do require a solid understanding of financial markets to use effectively.

While some argue these contracts can be complex for newcomers, certain platforms have responded by creating more user-friendly interfaces. It's worth noting that trading perpetual futures doesn't involve owning the underlying cryptocurrency - it's purely about price speculation.

How Do Perpetuals Work? 

1. Funding Rate: 

   • Keeps the futures price in sync with the actual asset price

   • You might pay or receive money, depending on market conditions

2. Trading Positions: 

   • Going Long: You're saying, "This price is going up!"

   • Going Short: You're predicting, "This price is heading down!"

3. Initial Margin: 

   • It's like a security deposit for your trade

   • Just a fraction of the total trade value gets you into the game

4. Maintenance Margin:

   • Think of it as your trading account's minimum balance

   • Fall below this, and you risk getting kicked out of your position

Let's Paint a Picture:

Imagine you're bullish on Ethereum. You buy an ETH perpetual futures contract, betting its value will rise. If ETH's price climbs, you're in profit territory.

Now, flip the script. You have a hunch ETH's price is about to take a nosedive. You sell a perpetual futures contract. If ETH's value drops, you're in profit territory.

How Are Perpetual Futures and Futures Contracts Different:

• Continuous Trading vs Expiration Date: Perpetual futures do not have an expiration date, allowing for constant trading, whereas traditional futures contracts have a set timeline for expiry. 
• Market Usage: Traditional futures contracts are widely used across various financial markets, while perpetual futures are predominantly linked to cryptocurrencies. 
• Leverage and Trading Speed: Perpetual futures offer high leverage and enable quick trades, while traditional futures are often used for hedging and speculating on future prices with less emphasis on leverage. 
• Funding Rate vs Storage Costs: Perpetual futures involve a funding rate mechanism to maintain price alignment, while traditional futures contracts might include costs related to storage.

Benefits of Perpetual Futures

• Long or Short: Provide the flexibility to go long or short, allowing traders to capitalize on market volatility or during a bear or bull market. 
• High Leverage: Traders can use high leverage to amplify their positions, potentially increasing their returns from price movements. 
• No Ownership of Underlying Asset: It does not require ownership of the underlying asset, eliminating certain risks associated with physical assets. 
• No Expiration Date: Traders do not need to worry about renewing positions, saving time and eliminating unnecessary fees. 
• Risk Management: Traders can leverage and hedge their positions, enhancing their ability to amplify potential returns during uptrends and protect their holdings during downtrends. 

Author’s Bio

Eduard Jubany Tur, has been supporting startups, leading teams and using those insights to drive product innovation for over a decade now. His focus has been deep-diving into the many nuances of doing business in Asia, and he has worked with over 100+ startups in the region. This has led him to find his current passion in web3.