What Is a Perpetual Futures Contract?
A futures contract is a derivative instrument – one that is based on an underlying entity – stocks, Bitcoin, gold, anything. More specifically – it is a binding legal agreement to trade a specific security or asset at a certain price and at a predetermined time in the future. While the seller of a futures contract is responsible for supplying the asset specified in the contract upon its expiration, the buyer is also agreeing to accept the asset simultaneously.
On derivatives exchanges, counterparties trade a contract signifying an actual asset and containing all details of the settlement of said asset at a particular point of time in the future. The actual asset trading happens when the contract is terminated, instead of just directly and instantaneously settling the trade like the traditional spot exchange.
The word perpetual means permanent, or timeless. A perpetual contract (or perpetual swap) is essentially a type of futures contract, with a few notable distinctions:
- While regular futures contracts contain an agreement to buy/sell an asset at a specific point in time, a perpetual contract does not have an expiry date.
- So if you do open a position (long or short) in the perpetual futures market, you can basically hold on to that position for an infinite amount of time, unless your position gets automatically liquidated.
Now why would this be of interest to traders?
Advantages of Perpetual Contract Trading:
Perpetual contracts have some advantages when stacked against regular futures contracts. Let’s take a quick look at some of the apparent benefits:
- No expiry dates proves to be one of the most advantageous aspects of a perpetual futures contract. Counterparties can hold on to the trades as long as they want and also avoid any added trading expenses, except from the funding costs.
- Factors like market demand and supplies dictate the price of the assets to be exchanged.
- Some exchanges, Delta included, choose to make the process transparent, w. hich is a quality that works in favour of the perpetual contract traders. An open order book records and determines the trading order, and the order of contract terminations is decided on the basis of their priority.
- Traders get the chance to perform both long and short trades, and the futures market allows trading in all market conditions. So you can make profits in both bear and bull markets.
- Traders have the scope for margin tradingor leverage. The contracts make it possible to make a relatively higher profit out of a small initial investment, as the leverage is high and the traders can open or close market positions with just a trifle of their personal balance. Delta Exchange allows you to trade with upto 100x leverage, which quite obviously yields more profit and therefore intrigues investors.
- Plus, there’s the short selling opportunity so that a trader might earn from a deflation too.
Are Perpetual Swaps Secure?
When it comes to perpetual swap trading, you need to make sure the cryptocurrency derivatives exchange you are using can be trusted and would secure your initial funds and all your personal information in the best possible way. Here are a few maneuvers Delta Exchange, and most reputed exchanges, implement that guarantee absolute safety:
- KYC (Know Your Customer) and AML (Anti Money Laundering) procedures to avoid identity theft and suchlike
- Completion of a multi-factor authentication process before granting an user access
- A trading network that is differentiated from the general world wide web (www) network
- Wallet protection by storing a large portion of the funds in offline or cold storages
- Well-equipped security systems keeping tabs on all users and trades to recognize and root out any security breaches, threats or frauds immediately
- Staff training curriculum on the importance and maintenance of security that gets updated frequently
- Frequent investigations of the security system and beta testing
Trading Bitcoin Perpetual Contracts
A perpetual Bitcoin futurescontract option offered by most crypto exchanges is the one with the Bitcoin price tracking relative to USDT. Ever since BitMEX’s perpetual swap XBTUSD reportedly became a success, Bitcoin perpetual swaps have become all the rage indeed, especially with the added fact that traders can take on positions with upto 100x leverage.
For traders on crypto exchanges, who want to hold long term positions and do not want these positions to auto liquify, the BTC perpetual swap is definitely the greatest option.
Now, let’s find out how the workings of the BTC perpetual swap.
How Do Bitcoin Perpetual Swaps Work?
At Delta Exchange, all profit, loss, margin and settlement calculations are quoted in USDT for BTC perpetual contracts, which basically means you must be in possession of USDT to trade Bitcoin perpetual swaps. To track the price for Bitcoin, the index used is .DEXBTUSDT, which is the average BTC/USDT price on Binance, Gate.io and Huobi.
For a comfortable trading experience, it’s also necessary for you to know Delta’s margin trading rules before you go ahead and take part in a BTC perpetual swap.
Now, let’s look an example of how perpetual swaps work.
At the beginning of April 2020, the trading price for BTC/USDT was bordering on an average of $6500. So say Trader X bought three BTC/USDT perpetual swap contracts using $6500 at that time.
Now, how did they purchase 3 contracts with $6500? Using leverage, which allows them to enter positions with a smaller margin amount. Initial margin on BTC/USDT on Delta can be as low as 1%, allowing traders to transact up to 100x the asset value. Of course, this also makes it exponentially risky, so for example’s sake, we’re assuming they had a 33% margin, and therefore 3x leverage.
Fast forward to the end of July 2020, the BTC/USDT price had risen to an average of about $11000. In the meantime, funding fees had been deducted from X’s account, and they had also had rebates added.
So now it turned out that X had perfectly timed their buying of those perpetual contracts, and would be closing their position after almost four months with profits of $52000 (not taking the funding fees and the rebates into consideration)!
Oh, and, how did the profit get calculated?
Profit/loss = position size * current price – initial margin
So in X’s case-
Profit = 3*19500 – 6500
Profit = $52000
X got very lucky indeed, what with all that profit. Due to market volatility, that might not always be the case. Good thing perpetual future contracts don’t have expiry dates, hah?