What Is Perpetual Futures Contract？

The current and upcoming years will see significant changes in the way that the world’s economic and financial systems operate. Crypto and Finance have seen significant changes as a result of deregulation efforts, technology advancements, and competitive pressures. The market has been expanded with a variety of solutions that can satisfy the operators, and one of these, is the possibility of using perpetual contracts. This article will provide an introduction to derivatives products and their uses, plus some comparison with other financial products and some examples for a better understanding.

What Is a Perpetual Contract?

A Gate.io Perpetual Contract is an innovative financial outgrowth in crypto space, which is analogous to a traditional futures contract but has no expiration and settlement. Traders only need to concentrate on the ups and downs of the price, making it an easy-to-use instrument. Also, it provides advanced influence over the traditional futures.

The trading of perpetual contracts is founded on an underpinning Index Price. The Index Price is the average price of an asset, which is calculated considering the major spot requests and their relative trading volume.

Therefore, unlike conventional futures, perpetual contracts are frequently traded at a price that’s equal or veritably analogous to spot requests. Still, during extreme request conditions, the mark price may diverge from the spot request price.

Definitions

Traders should be aware of the following mechanics of the perpetual contract:

• Initial Margin: Is the smallest amount of crypto a trader has to deposit to start margin trading.
• Maintenance Margin: Is the smallest amount of crypto an investor must have to continue margin trading.
• Basis: The price difference between the futures contract and the underlying spot market
• Mark Price: Is used to quantify unrealized profit and loss for all traders to avoid market manipulations and ensure that the perpetual contract price matches the spot price.
• Funding Rates: Are payments made to long or short traders based on the gap between perpetual contract markets and spot prices regularly. Longs pay shorts if the rate is positive; shorts pay longs if the rate is negative.
• Leverage: Perpetual contracts don’t require users to post 100% of their collateral as margin. They can trade up to 100x leverage on some Gate.io contracts.
• Unrealized PnL: Current profit and loss from all positions.
• Liquidation: The term “liquidation” simply means converting assets to cash. Forced liquidation refers to an involuntary conversion of crypto assets into cash or cash equivalents (such as stablecoins). Forced liquidation occurs when a trader fails to meet the margin requirement set for a leveraged position.

Perpetual Contracts vs Delivery Contracts

Before analyzing what the differences are between a delivery and a perpetual contract, let’s define a delivery contract.

What Is a Delivery contract?

A delivery contract is an agreement to buy or sell a commodity, currency, or another instrument at a destined price at a specified time in the future. In traditional finance, a future contract is similar to a delivery contract in crypto.

Unlike a traditional spot request, the trades aren’t ‘settled’ instantly. Instead, two counterparties will trade a contract that defines the agreement at a future date. Also, a future doesn’t allow traders to buy or sell the commodity or digital asset directly. At that moment, they’re trading a contract representation of those (commodities, digital assets, etc), and the actual trading of assets will happen in the future, at the moment the contract expires.

Reminder: In traditional finance, _”futures contract” and “futures” refer to the same thing. For example, you might hear somebody say they bought oil futures, which means the same thing as an oil futures contract. When someone says “futures contract,” they’re typically referring to a specific type of future, such as oil, gold, bonds, crypto, or S&P 500 index futures.

With the advent, in crypto, of perpetual contracts, the term “Future” is more commonly referred to as “Perpetuals”, while the term “Delivery” is referred to the contract with a settlement date._

Differences

Quick Answer: Why trade Perpetual?

The answer is that traders can buy or sell perpetual contracts and in this way they can profit both from rising and falling rates.

How to Trade With Gate.io Futures (Perpetual)?

For a better understanding let’s assume that the spot price and the contract price are the same, and do not consider trading commissions and funding fees involved.

Scenario 1: Buy/Go Long

The current Bitcoin price is 5000 USD. Mr. Lee and Mr. Wang both are bullish on Bitcoin price. Mr. Lee buys 1 BTC in the spot market. Mr. Wang uses 1 BTC as margin to buy 500,000 perpetual contracts (100 BTC equivalent) with 100x leverage. If the BTC price rises to 5500 USD, Mr. Lee will earn 500 USD, a 10% rate of return, while Mr. Wang will earn 10 BTC equivalent, a 1,000% rate of return.

Scenario 2: Sell/Go Short

The current BTC price is 5,000 USD. Mr. Lee and Mr. Wang both expect the BTC price to go down later. So, Mr. Lee sells his 1 BTC to stop loss and Mr. Wang sells his 500,000 contracts (100 BTC equivalent). If the BTC price drops to 4,500 USD, Mr. Lee will protect himself from a 10% loss, while Mr. Wang will gain a 1,000% rate of return instead.

Risk of Perpetual Contract Trading

The BTC price is 5,000 USD currently. Mr. Lee and Mr. Wang expect the BTC price to go up. Mr. Lee buys 1 BTC in the spot market while Mr. Wang chooses to go long on 500,000 perpetual contracts (100 BTC equivalent) with a 100x leverage of 1 BTC as margin. Unfortunately, the BTC price does not go up but drops to 4,990 USD later. Mr. Lee loses 0.2% while Mr. Wang loses 20%.

lf the BTC price falls all the way to 4,975 USD. Mr. Lee would lose 0.5% while Mr. Wang would be left with only 0.5 BTC in his margin account (0.5% is the maintenance margin level). Mr. Wang would suffer forced liquidation and lose all his margin.

In the above scenarios, Mr. Wang gains more earnings using Gate.io perpetual trading than Mr. Lee with the same amount of investment, provided that they make correct predictions about market movement. This method brings them returns even in a falling market. However, if the market moves against their expectations, Mr. Wang would suffer amplified losses.

Note: The above scenarios are simplified examples for your better understanding of perpetual contracts. For more information about funding fee, auto-deleveraging, mark price, etc., please visit our website for details.

Conclusion

Gate.io currently offers Perpetual trading for users in a safe, stable, and reliable trading platform with one of the highest liquidities among all exchanges, making your trading experience the best possible.