What are Perpetual Futures?

2023.06.20

Key Takeaways

Perpetual futures are a type of futures contract that does not have an expiration date. Unlike traditional futures contracts, which expire at a specified date in the future, perpetual futures do not have a settlement date. Instead, they are designed to track the price of an underlying asset, such as Bitcoin, and maintain a constant price through a funding mechanism.

Perpetual futures contracts are settled daily through a process called funding. Funding is a fee paid by one party to the other, based on the difference between the contract price and the spot price of the underlying asset. If the contract price is higher than the spot price, then long positions pay funding to short positions, and vice versa.

How Do Perpetual Futures Work?

Perpetual futures are traded on cryptocurrency exchanges, where buyers and sellers can enter into contracts with each other. The contracts are based on the price of an underlying cryptocurrency, such as Bitcoin, and are settled in that cryptocurrency. For example, a Bitcoin perpetual futures contract is settled in Bitcoin.

The value of a perpetual futures contract is determined by the market demand for that contract. If there is more demand for long positions, then the price of the contract will increase, and if there is more demand for short positions, the price of the contract will decrease.

Perpetual futures contracts use leverage, which means that traders can trade larger positions than their account balance would allow. For example, if a trader has $1,000 in their account and uses 10x leverage, they can trade a position worth $10,000. However, leverage also increases the risk of losses, and traders must be careful not to overleverage their positions.

Why Are Perpetual Futures Important?

Perpetual futures are an important tool for traders and investors in the cryptocurrency market. They provide a way to trade cryptocurrencies with leverage, allowing traders to make larger profits than they would be able to with their account balance alone. Additionally, they allow traders to take both long and short positions, which can be used to profit from both rising and falling markets.

Perpetual futures also provide liquidity to the cryptocurrency market, making it easier for traders to enter and exit positions quickly. The market for perpetual futures is open 24/7, unlike traditional markets that have specific trading hours, providing traders with more flexibility in their trading strategies.

Perpetual futures are a popular derivative instrument used for trading cryptocurrencies. They offer traders and investors the ability to trade with leverage, take long and short positions, and provide liquidity to the cryptocurrency market. However, traders must be aware of the risks involved with leverage and carefully manage their positions to avoid losses. As with any investment, it is essential to do proper research and understand the market before trading perpetual futures.