A complete guide to Bitcoin Perpetual Contracts - Why are they going to the best trading and investment for cryptocurrency traders?

A complete guide to Bitcoin Perpetual Contracts - Why are they going to the best trading and investment for cryptocurrency traders?

If you are familiar with cryptocurrencies, you should already know all about cryptocurrency spot trading. Now, perpetual futures, and general cryptocurrency futures, are crypto derivatives, and they provide cryptocurrency traders with  a whole new and innovative way to trade the cryptocurrencies of their preference (for instance, there exist Bitcoin futures and Bitcoin perpetual futures). In this post, we give you all the details regarding perpetual futures and why they are a better way of trading crypto than spot trading. But first, let’s see the basics of a general cryptocurrency futures contract, shall we?

What is a Crypto Futures Contract?

A cryptocurrency futures contract is a crypto derivatives instrument that is based on an underlying crypto asset. Essentially, a crypto futures is a binding agreement to exchange a crypto asset at a specific price and a fixed point of time in the future.

For example, Bitcoin futures are derivatives contracts that allow you to buy or sell BTC at a predetermined price and have a fixed maturity date. Bitcoin futures traders bet on the price of BTC at a specific point of time in the future, and by forecasting whether the price of BTC would rise or fall at that exact time and date, Bitcoin futures traders can either opt for a long position to buy BTC at a certain price upon the expiry of the Bitcoin futures contract, or they can go for a short position and instead sell BTC at a fixed price upon the expiry of the Bitcoin futures contract.

Trading cryptocurrency futures contracts usually involves ‘margin trading’- margin is a small percentage of the full transaction value a trader has to wager away during the trade of the crypto futures. In margin trading, both counterparties in the cryptocurrency futures trade have to deposit the marginal price (the prices can vary for them based upon the market conditions). With margin trading, a buyer profits when the BTC price increases, and a seller benefits when the price of BTC drops. When the market goes up, the margin is automatically moved to a buyer, and the opposite happens when the market gets down.

Now, What are Perpetual Futures?

Perpetual futures are also crypto derivatives, and a certain type of the traditional crypto futures contract. The word perpetual means permanent, or timeless. A perpetual futures contract comes with the added advantage of leverage, and does not have a predetermined expiry date or settlement like normal cryptocurrency futures. Instead, perpetual futures have no expiry date and therefore exist in ‘perpetuity’.

That means, Bitcoin perpetual futures are futures contracts with no expiry or settlement date meaning one can hold a position for as long as they want. They are often traded at a price that is equal or close to the spot markets, thanks to the funding mechanism. For Bitcoin perpetual futures, if you open a long or short position, you can hold on to that position for an infinite amount of time; unless, of course, your position gets automatically liquidated.

Bitcoin perpetual futures is also often called an “inverse Bitcoin futures contract”, since the settlement of a BTC/USD futures contract is done in BTC instead of USD. At the C-Trade platform, traders can utilize a leverage up to 150x to maximize their trading strategy.

The trading of perpetual futures is based upon an underlying Index Price. This Index Price consists of the average price of a crypto asset, as per major spot markets and their relative trading volume. Therefore, unlike traditional crypto futures, perpetual futures are often traded at a price that is equal or very close to the spot markets.

Advantages of Perpetual Futures Trading:

Perpetual futures come with some exclusive benefits when compared to the spot trading of cryptocurrencies, such as:

  1. Margin Trading and Leveraging:

When it comes to spot trading, traders can make profits if they buy low and sell high, only when the price of a particular crypto goes up. On the other hand, with perpetual futures, traders have the scope for margin trading and leverage. The perpetual futures allow traders to make a significantly higher profit from a small initial investment, since the leverage is high and traders can open or close positions in the market with a bare fraction of their personal balance.

2. Lesser Risks Associated With Crypto Price Volatility:

Since with perpetual futures, traders can lock in a specific price upfront, their investments are provided a layer of protection against fluctuations in the prices of the underlying cryptos, as they can continue to pay that fixed price even when the values of the assets change. In fact, perpetual futures allow traders to profit off of the changes in crypto prices. For example, with Bitcoin perpetual futures, traders can benefit from a forecasted price drop through short selling - that is, betting against BTC’s price.

3. Hedging:

Perpetual futures allow traders to hedge their future revenues, and lessen any uncertainties related to the anticipated cash flow.  

4. No Need to Hold the Actual Cryptocurrencies:

Perpetual futures let traders wager on the prices of cryptocurrencies without owning the coins themselves, so people who cannot hold cryptos for location-specific issues can also participate in crypto trading through perpetual futures.

Bitcoin Perpetual Futures:

Making profits through Bitcoin perpetual futures involves careful market analysis and quick decision making. With Bitcoin perpetual futures, traders have the potential to make profits in both bull and bear markets with a relatively smaller amount of capital, by using leverage and having the flexibility to open long/short positions. This makes trading Bitcoin perpetual futures stand out from standard trading of Bitcoin in the spot market.

Margin trading and leverage trading for Bitcoin perpetual futures can go up to 150X on the C-Trade website. The higher you leverage is, the lower initial margin you’d need to open a position in Bitcoin perpetual futures.

More benefits of Bitcoin perpetual futures include the fact that the Bitcoin market works 24 hours a day, 365 days a year, which gives Bitcoin perpetual futures traders an opportunity to make money on weekends, holidays and any other time since traders can adjust their trades accordingly.

The technicalities of Bitcoin perpetual contracts include:

  • Mark Price Mechanism: This determines how positions are marked and thus the realized and unrealized Profit and Loss (PnL) of positions. It is also used to trigger liquidation; the liquidation mechanism varies from one exchange to another.
  • Leverage: This determines the level of collateral required to open a position. It can be 10X, 20X or even 100X. For example, if it's 100X, it means a trader with 1 BTC can open positions for 100 BTC. Maintenance margin is the amount of collateral required to sustain a position.
  • Funding: This is the time when exchange of funding payment between buyers and sellers occurs. It helps keep the perpetual futures prices close to the underlying spot index prices. On most exchanges, the exchange takes place every 8 hours.
  • Insurance Fund: This makes sure winning traders get their profits when losing traders have their balances drop to below zero.

In conclusion, Bitcoin perpetual contracts are an important part of the cryptocurrency ecosystem. They help traders hedge, manage risk and mitigate the current Bitcoin volatility, providing a new opportunity for traders to profit in both bull and bear markets. Bitcoin perpetual contracts are increasingly gaining traction in the crypto-trading circles, which can be proven by the soaring daily trading volume.

As a trader, the best way to get involved in Bitcoin perpetual futures trading is to choose a reputable and secure platform. Supply and demand determine the prices of Bitcoin perpetual contracts. Trading on a secure and anti-manipulative platform is therefore essential.

You can trade Bitcoin perpetual futures on our website at a low fee, with high market liquidity, and of course, with up to 150x leverage!
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