A perpetual futures contract, also known as a perpetual swap in finance, is an agreement to buy or sell an asset at an undefined date in the future without the choice to do so. Perpetual futures are cash-settled and differ from conventional futures in that they do not have a pre-determined delivery date, allowing them to be held indefinitely without the requirement to roll contracts over as they approach expiration. Payments are made on a regular basis between the holders of the long and short sides of the contracts, with the direction and magnitude of the settlement determined by the difference between the contract price and the underlying asset, as well as, if applicable, the leverage difference between the two sides.
In 1992, economist Robert Shiller proposed perpetual futures as a way to enable illiquid asset derivatives markets. Perpetual futures markets, on the other hand, have only developed for cryptocurrencies when BitMEX introduced them in 2016. High leverage, sometimes over 100 times the margin, is available in cryptocurrency perpetuals, as is the use of auto-deleveraging, which requires high-leverage, profitable traders to forfeit a portion of their profits to cover the losses of the other side during periods of high market volatility, as well as insurance funds, pools of assets designed to avoid the need for auto-deleveraging.
Perpetuals are similar to contracts for difference (CFDs) in that they allow indefinite, leveraged tracking of an underlying asset or flow, but they differ in that they trade a single, uniform contract on an exchange for all time horizons, leverage amounts, and positions, as opposed to separate contracts for separate leverage amounts typically traded directly with a broker.
So, what exactly is perpetual trading?
Perpetual contracts are derivative contracts that are similar to futures but do not have an expiration date or a settlement date, allowing them to be kept or traded indefinitely.
In futures, what does eternal mean?
A perpetual contract is a sort of futures contract that does not have an expiration date, unlike ordinary futures. As a result, anyone can stay in a position for as long as they choose. Aside from that, perpetual contract trading is predicated on an underlying Index Price. The Index Price is the average price of an asset calculated using main spot marketplaces and comparable trading volume.
Perpetual contracts, unlike traditional futures, are frequently traded at prices that are equivalent to or extremely similar to spot markets. The mark price may, however, differ from the spot market price in exceptional market situations. Still, the most significant distinction between ordinary futures and perpetual contracts is the former’s’settlement date.’
What is the difference between spot and perpetual futures?
A perpetual contract is a novel derivatives product that is similar to a hybrid of spot margin trading and futures trading. It has five basic qualities that define it and that we use on Bybit:
1. There is no expiration date
Spot trading necessitates immediate settlement, whereas future contracts necessitate resolution at a later date. Perpetual contracts, on the other hand, do not have an expiration date, allowing all traders to trade in a stress-free atmosphere. Speculative traders and traders that perform trade hedging will benefit from it because they can buy/sell positions and keep them for as long as they like. Furthermore, investors do not have to worry about settlement fees or rollover expenses, but they should keep an eye on the financing periods because they may be charged or reimbursed for maintaining a position.
2. Manipulation Resistant Dual Price Mechanism
The act of artificially increasing or deflating the price on an exchange for personal gain is known as market manipulation. Such unusual price changes may result in malicious liquidations of traders’ holdings, creating a very unequal trading environment.
To provide a fair trading environment, we use a Dual-price system at Bybit to safeguard traders from market manipulation. Most exchanges currently use the Last Traded Price as the liquidation trigger. Instead of using the latest traded price as the trigger for liquidation, Bybit uses Mark Price. Traders can use Mark Price as a benchmark for real-time spot price transactions on key exchanges. As a result, Bybit is powerless to influence Mark Price.
3. Make a market price.
The contracts’ price is also pegged to the spot market, which is another feature of Bybit’s perpetual contracts. Bybit’s latest traded price is quite similar to the spot price. The major mechanism for tying its price to the current market is referred to as “Financing.” Every 8 hours, at 04:00, 12:00, and 20:00 Hong Kong Standard Time (GMT+8), financing is transferred between long and short positions on Bybit. As a result, Bybit’s trading price is marked to market every eight hours.
4. Flexible Leverage of up to 100:1
The leverage in the ordinary spot margin market is usually 35x, and borrowing fees can be considerable. The current exchanges provide 520x leverage for futures contracts. Bybit, on the other hand, offers Perpetual Contracts with up to 100x leverage. An open position’s leverage/margin can be changed at any time by the trader. This is a very flexible method of risk management that guarantees the greatest trading experience possible.
5. Investor Protection Through a Comprehensive Contract Loss Mechanism
Bybit makes use of a “Auto-Deleveraging” (ADL) is a contract loss mechanism designed to shield investors from significant losses sustained by risky traders. Unlike the commonly used socialized loss method, which requires all winning traders to split the expenses, the ADL mechanism will rank all traders systematically by their profit percentage and effective leverage, picking the most leveraged and greatest profit traders to be de-leveraged first. The main advantage of ADL is that smaller risk takers will be less likely to absorb the contract loss.
How long may a perpetual futures contract be held?
Perpetual futures contracts, on the other hand, do not have an expiration date, as the name implies. As a result, unlike quarterly futures contracts, traders do not need to keep track of different delivery months. A trader, for example, can keep a short position open indefinitely unless he is liquidated.
What is the purpose of trading perpetual futures?
- Futures provide exposure to a wide range of assets, allowing for hedging and risk management.
- Traders can establish short bets and profit from a negative price movement if they anticipate an unpleasant price movement. If one could only purchase and sell spot positions, this instance would not be possible.
- Traders can utilize leverage to enter positions that are larger than their account balance, borrowing funds from liquidity providers to execute massive transactions and reap greater profits.
What is the perpetual financing rate for futures?
Exchanges utilize Funding Rates to ensure that futures and index prices converge on a regular basis because perpetual futures contracts never settle. Funding Rates are payments given to or by long or short traders based on the difference between perpetual contract markets and spot prices on a regular basis.
Are perpetual futures a risky investment?
When you buy altcoins with futures, you can’t use them for staking or lending. This is another issue to consider for investors who are willing to hold a stake for a lengthy period of time.
Staking and lending services are available on a variety of platforms, including the leading centralized exchanges. Polkadot (DOT), Tron (TRX), Cosmos (ATOM), and Cardano are some of the altcoins with 30-day contract annual percentage yields (APY) ranging from 7% to 18%. (ADA).
Another approach to make money with altcoins is to join a decentralized (DeFi) mining pool. Users should be aware of the inherent hazards in this industry, particularly in pools when impairment loss occurs between two separate cryptocurrencies.
As a result, if you choose perpetual futures, you will be unable to participate in staking and yield farming. It may not have an impact on individuals speculating on short-term price movements, but as the weeks pass, it becomes more significant.
What exactly is BTC perpetual?
A perpetual swap is becoming more popular as a means to trade bitcoin since it allows investors to buy and sell the value of bitcoin without actually owning any. Perpetual swaps having no expiration date, no settlement date, no need to trade the underlying asset, and are simple to short.
Because of the funding rate mechanism, perpetual swaps closely track the price of the underlying asset. This mechanism balances demand between buyers and sellers of perpetual swaps, allowing the swap’s price to match that of the underlying asset.
Which is better, futures or spot?
“Which market is better to trade, spot or futures?” traders sometimes wonder.
If you’re searching for a longer-term investment, the short answer is spot markets. You should trade the futures market if you wish to hedge your trades or boost your leverage.
I hope that’s as plain an answer as you’ll find on the spot market vs. futures market issue anyplace on the internet.
Let’s unpack this topic further now that I’ve addressed the answer for those of you with a 10-second attention span.
Is futures trading prohibited?
Futures transactions, which are popular in today’s stock and commodities markets, are not permitted for two reasons. To begin with, it is a well-established Shariah concept that a sale or purchase cannot be delayed. As a result, in Shariah, all Forward and Futures transactions are invalid.