The world of cryptocurrencies is becoming increasingly diversified and sophisticated, showing striking similarities to traditional markets. Nowadays, most cryptocurrency exchanges offer margin trading, derivatives, and advanced orders. One such concept, which is a derivative of futures contracts known as perpetual contract trading, is gaining traction. This concept seems to be exclusive to the crypto world and is not seen in traditional trading scenarios, so, let’s find out what this entails.
What are perpetual contracts?
The way contracts work is that one does not need to hold an underlying asset to trade by speculating its future price. Instead, one can simply purchase the contract if they expect the price to go up or sell if they expect the price to drop, which is possible because the price of the asset mirrors that of the contract and vice versa.
The difference between futures contracts and perpetual contracts is that in futures, there is an obligation to buy or sell the underlying asset at a specific price, while there is no termination date in perpetual contract trading. So technically, a Bitcoin perpetual contract is an agreement between two parties to buy or sell any underlying assets - in this case - Bitcoin - at a predetermined price in the future, which enables investors to participate in leverage and margin trading.
The contract is essentially between a buyer and seller to exchange the difference in the value of a particular asset between the time a contract opens and closes, which means that any trader can make profits out of both bearish and bullish markets, in principle.
This explains some similarities to traditional markets and, to some extent, spot trading.
Apart from any applied leverages, the index price of a futures contract is tied down to the market prices of underlying assets, while a perpetual contract acts more like spot trading where the price of the underlying asset is tracked but without any specified expiry date. As a result, the price is always the same as the spot price whereas, in futures, the price is equal to spot x (1+ forward rate x expiration time).
Due to these features, the possibility of margin or leverage trading of up to 100x is possible, which enables investors and traders to open and close positions with a fraction of their account balance, enabling them to make higher returns.
Of course, these should be attempted if you have the ability to read crypto chart patterns and understand crypto technical analysis well and if you are an experienced trader with good risk management strategies for crypto trading in place. Check out these tips if you’re a beginner in crypto trading.
Some advantages and drawbacks of perpetual contracts
Since perpetual contracts are designed to give users a lot of flexibility, we get to conduct both short and long trades, unlike spot trading which happens to be unidirectional. Since crypto markets are always operational unlike traditional markets, trades can be executed even on the weekends.
Another major advantage is the leverages offered that are up to 100x, further improving the allure of perpetual contracts.
However, there are downsides that we need to consider while participating in perpetual contract trading as well, as it requires us to have relevant experience, clear-cut investment objectives, and ample financial resources. The leverage factor is also a two-sided coin. While it enables users to magnify profits, there is also a chance to completely have their assets liquidated by small market movements, which brings us to the concept of using stop losses.
What is a Stop Loss?
Similar to traditional markets, stop losses are risk-management tools to minimise and limit losses on existing positions while also being an automatic tool that enables users to enter the market at desired entry points without having to manually wait and enter it as the market moves. These kinds of orders are implemented as a brokerage function and the triggered stop losses aren’t guaranteed to execute at the exact time of triggering on the market.
All in all, this is an extremely useful tool to consider using when participating in perpetual contract trading, and it is imperative to choose the best crypto exchanges that offer such tools.
What are unrealised gains and losses?
Gains and losses are said to be realized when an owned asset is concrete while unrealized losses or gains are commonly known as “paper PNL”.
An unrealized loss is seen when an asset value decreases after an investor buys it but hasn’t sold it yet. This means that before a profit or loss is realized, the investor hopes that the value changes as expected. Similarly, if the value of the asset goes above the buying price, then the investor is said to have an unrealized gain until the time they sell it.
These are some of the key takeaways that any investor or trader looking to dip their toes into perpetual contracts must keep in mind. With the right knowledge and tools, perpetual contract trading can be extremely profitable to small-time traders and institutions alike. Read this detailed guide to Bitcoin perpetual futures here, and start your crypto trading journey on C-Trade today!
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