Understanding Perpetual Contracts
Perpetual contracts are a type of derivatives trading product that allows investors to speculate on cryptocurrency price movements without an expiration date. Unlike traditional futures contracts, perpetual contracts use a funding rate mechanism to keep their price aligned with the underlying asset's spot price.
Key Features of Perpetual Contracts
- No expiry date (trade indefinitely)
- Regularly settled funding payments between longs and shorts
- Available in both coin-margined (inverse) and USDⓈ-margined (linear) formats
- High liquidity across major trading pairs
Types of Perpetual Contracts
1. Coin-Margined (Inverse) Contracts
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- Quoted and settled in the base cryptocurrency (e.g., BTC)
- Profits/losses paid in the traded cryptocurrency
- Suitable for traders holding the underlying crypto asset
- Requires understanding of inverse pricing calculations
2. USDⓈ-Margined (Linear) Contracts
- Quoted and settled in stablecoins (e.g., USDT, USDC)
- Simpler profit/loss calculations
- Easier risk management for multi-position traders
- Growing popularity across exchanges
Essential Trading Concepts
Margin Requirements
| Margin Type | Description | Calculation Example |
|---|---|---|
| Initial Margin | Minimum to open position | Position Size / Leverage |
| Maintenance Margin | Minimum to keep position open | Typically 0.5%-5% of position value |
| Position Margin | Collateral for open positions | Sum of all margin allocations |
Funding Rate Mechanism
The funding rate consists of:
- Interest Rate Component: Usually fixed at 0.01%
- Premium Component: Depends on price difference between mark and spot prices
Funding payments occur every 8 hours (at 00:00, 08:00, and 16:00 UTC)
Risk Management Strategies
1. Position Sizing
- Never risk more than 1-2% of capital on a single trade
- Adjust leverage based on market volatility
2. Stop-Loss Orders
- Essential for limiting downside
Can be implemented as:
- Stop market orders
- Stop limit orders
- Trailing stops
3. Portfolio Diversification
- Spread risk across different crypto assets
- Balance between spot and derivatives positions
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Advanced Trading Features
Cross vs. Isolated Margin
| Feature | Cross Margin | Isolated Margin |
|---|---|---|
| Risk | Entire balance at risk | Only allocated margin at risk |
| Flexibility | Higher | Lower |
| Best For | Experienced traders | Position-specific risk control |
Mark Price System
Prevents unnecessary liquidations by using:
- Composite index price from major exchanges
- Smoothing mechanism to filter outliers
Frequently Asked Questions
Q: How often do perpetual contracts settle?
A: Unlike traditional futures, perpetual contracts don't settle. However, funding payments occur every 8 hours to maintain price convergence with spot markets.
Q: What determines the funding rate?
A: The funding rate depends on the difference between contract prices and spot prices. When contracts trade at a premium, longs pay shorts, and vice versa.
Q: Is higher leverage always better?
A: No. While higher leverage amplifies potential profits, it equally increases liquidation risks. Most professional traders use moderate leverage (5-20x).
Q: How can I avoid liquidation?
A: Maintain adequate margin, use stop-loss orders, monitor positions regularly, and avoid over-leveraging during high volatility periods.
Q: What's the difference between mark price and last price?
A: Mark price is used for liquidations and funding calculations, while last price is the most recent trade price. The mark price prevents market manipulation.
Q: Can I hold perpetual contracts long-term?
A: Yes, but you'll need to account for periodic funding payments. The cost/benefit depends on whether you're paying or receiving funding.