This lesson will specifically explain what perpetual futures(contracts) trading is in terms of related terms and concepts.
Perpetual Futures
In the previous lessons, we have explained the types of derivatives trading in the cryptocurrency market and briefly explained the concept of perpetual futures. As a type of futures contract, perpetual futures have no delivery date and are one of the biggest differences from traditional futures contracts with delivery dates. The trader can choose to hold the contract forever. The perpetual contract has now become a mainstream derivatives trading product on many cryptocurrency exchanges, and is an attractive derivative for traders who wish to hedge their spot positions or speculate on various asset prices, for example.
As a type of derivatives trading, perpetual contract trading offers traders the option of leverage, with the help of which they can trade on margin and thus expand their potential profits. However, this type of margin trading (i.e. the user trades with borrowed funds) increases the risk of investment, i.e. the possibility of liquidation of the margin. For this reason, perpetual futures are also considered high-risk assets.
Common Concepts in Perpetual Futures
Opening a position: Paying margin to open a margin trade. After opening a position, the trader will hold the corresponding position.
Closing a position: Close some or all of the positions held and exchange contracts for cash or cash equivalents (such as stablecoins).
Long: Choose to go long on a contract and take profit if the price of the currency rises in the future.
Short: Choose to short a contract and profit if the price of the currency falls in the future.
Forced Close: Forced close, or liquidation of crypto assets to cash or cash equivalents (e.g. stablecoins). A liquidation occurs when a trader fails to meet the margin requirements set for a leveraged position.
Initial Margin: The minimum amount of cryptocurrency that must be deposited to open a margin trade.
Maintenance Margin: The minimum amount of cryptocurrency required to continue a margin trade.
Leverage: A perpetual contract is a margin transaction that does not require 100% margin from the user, but is conducted through leverage. On Bitunix, some contract products support leverage of up to 125x.
Unrealized P&L: The profit and loss of the currently held position.
Funding Rate: A periodic payment to long or short traders based on the difference between the perpetual contract market and the spot price to maintain a similar price trend on both sides of the market. If the funding rate is positive, the long side pays the short side; if the funding rate is negative, the short side pays the long side.
Isolated Mode: The margin required to open a position will be used as a fixed margin for the contract position. Each contract position will have its margin and return calculated independently.
Cross Margin Mode: All balances transferred to the contract account, all contracts generated profit and loss will be used as margin for the contract position. When using the full position margin mode, the risk and return of all positions held in the account will be combined, and the position will only be closed out when the loss of the position exceeds the account balance.
USDT Margined, or USDT-M, is a contract that uses the stable coin USDT as the underlying for settlement, such as the BTC/USDT trading pair contract, whether long or short, requires a transfer of USDT to the account and uses USDT to settle the final profit or loss. As USDT itself is more stable in price, it can avoid additional ups and downs caused by price fluctuations of certain coins in contract trading.
P&L Calculation for Perpetual Futures
To better understand the profit and loss calculation in perpetual contract trading, let's assume that the spot price and the contract price are the same, and we don't consider transaction fees, rebates, and other commission costs.
Assuming the current bitcoin price is $20,000, and we use 20x leverage for perpetual futures, we can purchase $20,000 worth of BTC perpetual futures for only $1,000 due to leverage.
If we choose to go long:
We choose to be long on bitcoin and hold a long position. Three days later, the price rises to $22,000, which is a 10% increase. For the $20,000 position we hold, the value of that position has also risen by 10%, or a profit of $2,000. But since we only used $1,000 as a margin, the return to that position was (2,000/1000)*100%= 200%, which is a 2x return.
However, if the price of Bitcoin falls instead of going up, it drops to $19,000 after three days, which is a 5% drop. For our position worth $20,000, the value of that position drops 5%, for a loss of $1,000. Whereas we only used $1,000 as margin to hold the position, the return at that point would be (-1000/1000)*100% = -100%, i.e. if we had not added margin immediately, the entire margin in the position would have been lost.
In comparison, if one were to buy the equivalent amount of bitcoin spot for $1000, one would only have a 10% gain on a rise, or $100. But in the event of a 5% decline, its loss would only be $50.
Summary
perpetual futures, a type of cryptocurrency derivative, do not involve the delivery of cryptocurrencies, but rather track prices in the form of equivalent contracts. By using leverage, the gains can be magnified, but the risk of potential loss is also magnified by a multiple if one does not understand the market or encounters violent market fluctuations. Therefore, investors should exercise good risk control due to their ability to do so.
Disclaimer
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Crypto investment involves significant risks. Please proceed with caution. The course shall not be considered investment or financial advice.