What is Crypto Perpetual Contracts Trading?

What is Crypto Perpetual Contracts Trading

Content provided by various contributors. DYOR.

Crypto perpetual contracts trading is a type of financial derivative that allows traders to speculate on the price movements of cryptocurrencies without owning the underlying assets. These contracts, also known as “perpetual swaps,” have no expiration date and allow traders to hold a position indefinitely or until they choose to close it.

Perpetual contracts are traded on crypto derivatives exchanges, which use a mechanism called “funding” to ensure that the contracts remain balanced. Funding is the process of paying or receiving a small amount of the underlying asset (in this case, the cryptocurrency) between long and short traders, depending on the relative value of their positions. The exchange typically determines the funding rate based on the current interest rate of the underlying asset.

An example of crypto perpetual contract trading: A trader believes that the price of Bitcoin will increase shortly. The trader opens a long position on a Bitcoin perpetual contract, buying ten contracts for $10,000 each. The value of the contract increases as the price of Bitcoin goes up, and the trader can then choose to close the position and take profits or hold the position and wait for further price movements.

Alternatively, if the price of Bitcoin falls, the trader may choose to close the position to minimize losses or hold the position and wait for a price recovery. Depending on the funding rate, the trader may also have to pay or receive a small amount of Bitcoin to maintain the contract balance.

Crypto Perpetual Contracts Trading Benefits

There are several benefits to trading crypto perpetual contracts:

  1. High Leverage: Crypto perpetual contracts allow traders to access high leverage levels, meaning they can trade with a much larger position size than their account balance would allow. This could lead to greater profits but also greater losses.
  2. Short Selling: Perpetual contracts enable short selling, which allows traders to profit from price decreases in the underlying assets. This can be useful for hedging against a bear market or taking advantage of a perceived price bubble.
  3. Low Fees: Unlike traditional futures contracts, perpetual crypto contracts usually have lower trading and funding fees.
  4. 24/7 Trading: Unlike traditional markets, crypto derivatives exchanges are open 24/7, allowing traders to take advantage of price movements at any time.
  5. No Expiration: Perpetual contracts do not expire, allowing traders to hold positions for as long as they want.
  6. Lower Capital Requirement: Perpetual contracts can be traded with lower capital requirements than spot trading.
  7. No Delivery: There is no physical delivery of the underlying assets, eliminating the need for storage and custody solutions.

Crypto Perpetual Contracts Trading Risks

Trading crypto perpetual contracts can be highly risky, and it is important to know the potential risks before getting involved. Some of the risks include the following:

  1. High Leverage: The high leverage available in perpetual crypto contracts can amplify profits, but it can also amplify losses. A small price movement can result in a loss, especially if a trader is highly leveraged.
  2. Liquidity Risk: Crypto markets are generally less liquid than traditional ones, making it difficult to enter or exit a position at a fair price.
  3. Volatility Risk: Cryptocurrency prices can be highly volatile, leading to rapid and unexpected price movements. This can result in large losses if a trader needs to manage their risk properly.
  4. Counterparty Risk: As perpetual crypto contracts are traded on centralized exchanges, there is a risk that the exchange may not be able to fulfill its obligations, potentially leading to a loss of funds.
  5. Margin Call Risk: If a trader’s account balance falls below a certain level, the exchange may issue a margin call, which requires the trader to add more funds or close their position. If the trader cannot meet the margin call, their position will be closed, and they may suffer significant losses.
Bitcoin live price
Btc
Bitcoin
$23.797
price
3.0332%
price change
TRADE NOW

Remember that trading crypto perpetual contracts is highly risky and is mainly for professional traders. Retail traders should be aware of the high level of risk and should trade with caution.

Read more from author

Editor's picks

What Is Crypto Historical Data and How to Use It in Trading

Crypto historical data refers to past information related to cryptocurrencies such as Bitcoin, Ethereum, and others. This data includes various metrics such as price, trading volume, and market capitalization. Crypto historical data is useful for several purposes in crypto trading. First, it helps traders and investors make informed decisions by comprehensively understanding the crypto market's past performance. Crypto Historical Data Use Cases Here are some of the ways crypto historical data is used in crypto trading: Technical Analysis: Traders use…

How to Effectively Predict Crypto Prices

Predicting crypto prices is a complex task and requires a combination of technical analysis, fundamental analysis, and market sentiment. Here's a guide to help you effectively predict crypto prices: Technical Analysis: This involves studying past market data, including price and volume trends, to identify patterns and predict future price movements. Use charting tools, such as candlestick charts, to visually represent this data. Fundamental Analysis: This involves analyzing the underlying factors that may impact the value of a cryptocurrency, such as…

Guide to Value a Cryptocurrency

Valuing a cryptocurrency can be difficult and subjective, as many factors contribute to its worth. However, here are some steps and considerations for valuing a cryptocurrency: Market capitalization: This is the total value of the cryptocurrency in circulation. It is calculated by multiplying the total number of coins by the current market price. Adoption and usage: The more people use cryptocurrency, the more valuable it is likely to become. This includes individuals and businesses using it for transactions or as…

The Best Crypto Portfolio Trackers (Coin Trackers)

Crypto portfolio trackers are apps or websites that allow users to monitor their cryptocurrency holdings across multiple exchanges and wallets in one place. They connect to users' exchange and wallet accounts through APIs (Application Programming Interfaces) and automatically track the user's cryptocurrency holdings and transactions. The tracker updates in real-time and provides an overview of the user's total portfolio value, asset allocation, and returns. This allows users to track their investment performance and make informed decisions easily. What Should The…

An Overview of Different Cryptocurrency Scams

Cryptocurrency scams are fraudulent schemes that are becoming increasingly common as the popularity of cryptocurrencies continues to grow. They can take many forms and are often designed to appear legitimate investment opportunities or exchanges. Unfortunately, these scams can cause significant financial losses for individuals and harm the reputation of the cryptocurrency industry as a whole. It is crucial for anyone considering investing in cryptocurrencies to be aware of the various types of scams and to take steps to protect themselves.…

What Are Crypto Data Aggregators?

Crypto data aggregators gather data from multiple sources to provide comprehensive and real-time information about the cryptocurrency market. They pull data from various exchanges, trading platforms, and other sources to centralize the information and present it in a user-friendly format. The data includes cryptocurrency prices, trading volume, market capitalization, news, and other relevant information. Crypto data aggregators use algorithms to clean, process, and normalize the data to ensure accuracy and consistency across multiple sources. The information is then presented in…

What Is CoinGecko?

CoinGecko is a cryptocurrency data aggregator and tracking platform. It provides information and insights on the cryptocurrency market, including price, volume, trading activity, developer activity, and community growth. How CoinGecko Works Data Aggregation: CoinGecko collects crypto data from various cryptocurrency exchanges, wallets, and blockchains to create a comprehensive database of cryptocurrency information. Calculation of Metrics: CoinGecko calculates several metrics, such as market capitalization, trading volume, liquidity, and community growth, to provide a comprehensive overview of the cryptocurrency market. Display of…

What Is CoinMarketCap (CMC)?

CoinMarketCap (CMC) is a website that provides information about the cryptocurrency market and tracks the capitalization of various cryptocurrencies. It was founded in 2013 and has become one of the most popular cryptocurrency data providers. CMC aggregates information about the prices, volume, and market capitalization of cryptocurrencies from various exchanges and calculates the average value. Furthermore, the website displays this information in real-time, giving users a comprehensive overview of the cryptocurrency market. CMC tracks over 22,000 cryptocurrencies, including Bitcoin, Ethereum,…

What Are Crypto Pyramid Schemes?

A crypto pyramid scheme is a fraudulent investment scheme where returns are paid to existing investors from funds contributed by new investors. It's called a "pyramid" because it typically has many new entrants at the bottom, with each layer representing fewer investors. Example: John starts a pyramid scheme and invites five friends to invest 1 Bitcoin each. John promises to return 2 Bitcoins to each participant in a month. John needs 10 Bitcoins to fulfill his promise, so he invites…