A Guide to Understand a Perpetual Contract in Cryptocurrency Derivatives Trading

cryptocurrency derivatives

A perpetual contract is a significant part of the overall cryptocurrency derivatives trading volumes. They are different from a futures contract in terms that they do not have an expiration date and no settlement. The other features of a perpetual contract are similar to a futures contract.

If you wish to trade in these contracts, you probably have a few questions that need answering. This article will explain the most common questions that beginners have about perpetual crypto trading.

What Are The Advantages Of Perpetual Contracts Over Futures Contracts?

Unlike spot trading, which is direction-driven, perpetual contracts allow you to trade in both long and short positions. So, if you think that the market will be bearish at a given point in the future, you can short on the currency and make a handsome profit when the prices fall.

Perpetual markets also have better leverage than futures, allowing you to trade up to 100 times your cash investment. The higher the leverage, the better the return for the same about of investment. A word of caution, though; losses can be significant if you miss placing stop losses.

What Are The Hours of Trade?

Cryptocurrency derivatives trading is available 24×7. The only time trading is not allowed is when it is closed for maintenance, which is a tiny window. Since the currency is traded across geographies, trading is not time-bound. So, you can trade at your convenience.

What Are The Exchanges That Allow Trading In Such Contracts?

Several exchanges offer perpetual contract trading. Many more exchanges are adding it to their service offering to crypto investors and traders. One Singapore-based firm recently introduced Tether (USDT) in March 2020. It allows investor’s flexibility as it will enable them to hold both long and short positions simultaneously.

Another exchange introduced perpetual swaps in March 2020 that allowed traders the benefits of hedging, leveraging arbitrage opportunities, and mitigating risk in volatile market conditions.

How Much Do Spot, Futures, And Perpetual Prices Vary?

Usually, the variation between spot and futures is significant. The prices of perpetual crypto contracts are designed to be as close to the spot prices as possible. It makes it an attractive trade over futures as it is similar to margin trading in stocks. You can trade at spot levels, but with higher leverage.

How Much Can I Begin With for this Trade?

The minimum amount that you need to begin trading in these contracts depends on the exchange you use. You’ll need at least the minimum margin of the contract to trade in it. You will also need some amount of collateral to hold your positions in volatile markets. This is a maintenance margin.

The initial margin will allow you to open the position, and the maintenance margin will let you hold it in market fluctuations. It will be the total amount you need to start trading.

Is There A Stop Loss Mechanism?

When trading in crypto contracts, there are chances of your balance going into negative. To safeguard your investment, you will need to place stop-loss triggers. So, for example, you go long on a 10x BNB long position at $20 per coin.

You will need $2,000 to open the position. Suppose the price falls to $18 per coin, you will lose your entire $2,000. If the price falls further, say $17 per coin, you will end up paying $1,000 more, ending with a negative balance.

To save yourself from such price fluctuations, you can place a stop-loss, a.k.a. Insurance fund in the world of crypto trading.

The cryptocurrency derivatives trading market is becoming more sophisticated as more diverse products such as a perpetual contract, swaps, etc., are being launched by exchanges. You are now aware of the basics, so you can start trading in these products yourself.

Also read: What is Leverage Trading With Cryptocurrency?

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