Perpetual futures, often referred to as perpetual swaps, are a type of futures contract in the world of cryptocurrency trading. Unlike traditional futures contracts, perpetual futures do not have an expiry date. This means traders can hold these contracts for as long as they like, which makes them a popular choice for many traders in the cryptocurrency space.
Perpetual futures are designed to mimic the spot market but with added leverage. They are often used by traders for speculative purposes, as well as hedging existing spot positions.
Here are a few characteristics of perpetual futures:
- No Expiry Date: Traditional futures contracts have an expiration date, which means the contract will be settled at a specific time in the future. Perpetual futures, as the name suggests, do not expire. They can be held indefinitely, until the trader decides to close the position.
- Price Alignment: To ensure that the price of the perpetual futures contract is in line with the spot price of the underlying asset, a mechanism known as “funding rate” is used. If the price of the contract differs from the spot price, this funding rate incentivizes traders to bring the contract price back to the spot price.
- Leverage: One of the main reasons many traders use perpetual futures is the ability to leverage their positions. This means traders can take on larger positions than they would be able to with their existing capital. Leverage amplifies both potential profits and potential losses.
- Mark to Market: Perpetual contracts are marked to market frequently, often every 8 hours. This means the gains and losses are reflected in the trader’s account continuously. This mechanism allows for the realization of profits and losses and reduces the credit risk for the other party in the trade.
However, trading with leverage and in derivative products like perpetual futures is risky and it can lead to substantial losses. Hence, it’s important to understand the mechanisms and risks involved before getting involved in such trading activities.