Perpetual contracts: why should we consider them over futures?

Perpetual contracts: why should we consider them over futures?

The cryptocurrency market is rapidly expanding, and new products are being introduced to meet the needs of different types of traders. One of those products is the derivatives market. Derivatives are crucial in global markets enabling traders to hedge or speculate on price changes of the underlying asset. Bitcoin and crypto futures, options, swaps and forwards are all different types of derivatives.  A futures contract is a type of financial derivative and agreement to buy or sell an asset at a fixed price at a specified time in the future. A Bitcoin/crypto perpetual contract, on the other hand, is similar to futures contracts but does not have an expiry date or settlement. In the Bitcoin industry, perpetual contracts settlement of BTC/USD futures are often called ‘inverse future contract’ because settlement is made in BTC rather than in USD. Perpetual contracts are more attractive than Bitcoin/crypto futures and offer several advantages to traders.

  • Bitcoin is typically a volatile asset and traders use futures in order to lock in profits or and hedge risk. However, perpetual contracts are more suitable for traders who want to trade like a regular spot exchange. Unlike Bitcoin futures, perpetual contracts are traded based on underlying Index Price and therefore trade at price very close to spot markets. The index price is determined by the average price of an asset as per the major spot markets and their relative trading volume. Traders do not need to repeat the opening action every time since the contract does not expire.
  • Perpetual contracts are more suitable to Bitcoin speculative traders than futures contracts because they can hold positions for as long as they want. Traders can also close those positions at any time. To maximize trading strategy, perpetual contracts enable traders to leverage up to 150X.  This means that traders with 1 BTC deposit can open positions of 150 BTC. The low capital requirement is attractive to retail traders who are able to take benefit from the growing cryptocurrency market.
  • Under perpetual contracts, traders do not need to worry about settlement fees as well as rollover costs which is the case when trading futures. Funding rate is used to determine the fees to be paid and is transferred between traders and not charged by the exchange.
  • Since perpetual contracts are ‘inverse futures contracts’ crypto traders are able to trade without having exposure to fiat. The settlement is made in BTC not fiat such as USD. This is important because it enables by-passing of many regulatory hurdles involving fiat deposits on exchanges.
  • Lower transaction costs: since settlements for perpetual futures are done in BTC and not USD, lower costs are involved as there are no interbank and FX charges. A normal bank transfer can take 2-3 days to settle and incur charges as money moves from one bank to another. BTC transactions take place from one wallet to another and geographical distances do not matter since there is no reliance on payment aggregators.

Therefore, perpetual contracts are more suitable than futures for many traders as well as the broader cryptocurrency ecosystem. They are a sign of maturing the crypto market. As more people use perpetual contracts, market price discovery is streamlined.

Trading Bitcoin perpetual futures requires a reputable, stable and secure exchange. Ultrafast order matching and risk management are some of the key standout features to look out for when choosing a perpetual contracts trading exchange.

Some of the existing exchanges have system overload problems whereby traders cannot buy or sell during volatile markets. The failure or delays in placing orders means that traders lose opportunity to take the desired position leading to loss in profit. In addition, exchange should be fair in dealing with all traders so that they have equal opportunities to take position whenever they want without encountering system error. With system errors and overload issues, some traders are forced to reduce their trade which leads to unfairness. Therefore a reputable derivatives exchange platform should be able to handle trades at all times and enable users to execute their trades successfully. Exchanges can also use tools such as machine learning to monitor market manipulation which can cause abnormal fluctuations and liquidations.

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