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What are Perpetual Futures Contracts

Perpetual Contracts are the advanced derivative of conventional futures contracts, whereas it doesnu2019t have any specific expiry date so that the buyer or seller can hold their assets/position as long as they choose. In other words, one can buy the contract when the asset price will be subjected to rise in the future and conversely can sell the contract when the asset price is subjected to slump in the future.

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What are Perpetual Futures Contracts

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  1. Perpetual Contracts are the advanced derivative of conventional futures contracts, whereas it doesn’t have any specific expiry date so that the buyer or seller can hold their assets/position as long as they choose. In other words, one can buy the contract when the asset price will be subjected to rise in the future and conversely can sell the contract when the asset price is subjected to slump in the future.

  2. Before Perpetual Contracts To understand the concept of Perpetual Futures Contracts in detail, it is a must for us to recap the previous cryptocurrency derivative “Margin Trading”. Margin Trading (Leverage Trading) Margin Trading can also be referred to as Leverage trading as it follows the same methodologies. The term “leverage” alone explains the concept. That is leveraging( Lifting up) a trader's position to an eligibility level of trading more bitcoins with the funds he/she have.

  3. Introduction To Perpetual Futures Contracts “Perpetual future contracts” is the recent trading feature of many cryptocurrency exchanges and becomes popular among cryptocurrency traders. Understanding the concept of Perpetual Contracts (or)Perpetual trading will become easy if we can understand the concept of conventional futures contracts.

  4. What are Futures Contracts? A futures contract is a mutual digital agreement between the buyer or seller to buy/ sell an asset, commodity, currency or any other instrument at a predetermined fixed price at a specific date or time in the future. To convey simply, one can buy an asset from the seller at a predetermined price by not considering the current market price of the asset at a predetermined specific time in the future.

  5. How Does It work? let us consider the Alice and bob scenario for example. Alice ( The Buyer ) and Bob ( The Seller) create a contract between them to trade a bitcoin at a price of $10000 by the end of the year, exactly on December 31st. So, here bob must sell a bitcoin to Alice exactly at a price of $10000. For instance, if the bitcoin price surged to $12,000 on December 31st, then Alice could save a huge amount of money and can get a profit of $2000 from the trade. Comparatively, if the same bitcoin price has slumped to $9000, then Alice has to pay the same price declared in the contract that is $10000, and the bob can get a profit of $1000 from the trade. There will be 50 - 50 possibility of Profit or loss on both sides, hence we call this as a mutual contract. The loss & risk always of the contracts always depend on the market price of the underlying asset.

  6. Perpetual Futures Contracts Perpetual which means - Never Ending, so there is no expiry date. As Said above, Perpetual Contracts are the advanced derivative of conventional futures contracts, whereas it doesn’t have any specific expiry date so that the buyer or seller can hold their assets/position as long as they choose. In other words, one can buy the contract when the price will be subjected to rise in the future and conversely can sell the contract if the price is subjected to slump in the future.

  7. Difference Between Futures and Perpetual Contracts 1. Perpetual Future Contracts and Traditional Futures Contracts likely to be the same, but the only and the major difference is, Perpetual Contracts Doesn't Have any Expiry Dates. 2. And another significant difference is, perpetual contract receives funding fees, but in the futures contract, it won’t do it. Since a perpetual contract doesn’t have an expiry, it is likely to be considered as Spot- Trading but, with leverage. So, that we can trade nearly at the price of the current market value of the indexed asset, commodity, or crypto.

  8. Characteristic of Perpetual Contracts 1. 2. 3. 4. 5. 6. 7. No Expiry Date Mark Price Dual Price Mechanism Initial Margin & Maintenance Margin Funding Increased Leverage Ratio From 10X to 100 x or more Auto Deleveraging

  9. Mechanics Of Perpetual Futures Contracts Initial Margin Initial Margin is the minimum payable amount to open leverage positions, For example, if you choose 100:1 leverage to trade 10000 USDT then you should pay 100 USDT as the initial margin, Whereas the initial margin acts as the collateral of the contracts. Maintenance Margin The maintenance margin is the minimum balance amount that you must hold in your margin account to keep your trading positions open. Maintenance margin changes based on the market price of the underlying asset.

  10. Mechanics Of Perpetual Futures Contracts Liquidation If the maintenance margin drops below the minimum value, then your futures account will come under “Liquidation”. This liquidation limit differs based on an exchange, and the leverage ratio the trader chooses. Funding Rate It is the payment between buyers and sellers. Funding rate defines who is the payer and payee. If the funding rate is above zero, then it will be a positive funding rate, so that the longers( Contract Buyers) should pay the shorts ( Contract Sellers).

  11. Mechanics Of Perpetual Futures Contracts Mark Price It is the estimated price value of the contract, by comparing it with the current trading price. This mark price calculation prevents a futures account from being liquidated while there is huge volatility occurs on the market. Also, mark price plays a huge role in calculating the “ “unrealized PnL”. Insurance Fund Insurance funds safeguard a trader's futures account from bankrupt when there occurs a liquidation.

  12. Mechanics Of Perpetual Futures Contracts PnL Profit and Loss. There are Two PnL’s. 1. 2. Realized PnL Unrealized PnL. Auto De-Leveraging ( Contract Loss Mechanisms) It is the counterparty liquidation methodology. That can be employed when the insurance fund is not enough to meet the liquidation payables. If this exists in the traditional trading market, there becomes a situation, whereas the profitable traders can contribute to preventing the traders who are losing

  13. Exchanges that Supports Perpetual Futures Contracts 1. 2. 3. 4. 5. 6. 7. Binance BitForex ByBit KuCoin BitMex Xena OKex And more.

  14. Closing Thoughts… Perpetual Future Contracts are the most profitable trading instrument of the cryptocurrency trading market. By deploying advanced trading tools recommended by any exchanges, and by following unique strategies, one can prevent the futures account to fall under risk. For more details Read : Perpetual Contracts Explained www.bitdeal.net

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