What are Perpetual Contracts and How Are They Different from Future Contracts?

Bittime - Perpetual Contracts or in Indonesian what is called a perpetual contract is a concept that has no expiration date. So, how does the mechanism work, how does it differ from futures contracts, and how does it correlate with this dynamic cryptocurrency market? Let's understand together in the discussion in this article.

What are Perpetual Contracts?

Perpetual Contracts, also known as perpetual swaps, are derivative financial instruments that allow traders to speculate on the price movements of an asset without having to physically own the asset. 

These contracts are designed to have no expiration date, so they trade continuously like spot assets. In this case, Perpetual Contracts are similar to futures contracts, but without an expiration date.

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Working Mechanism of Perpetual Contracts

There are 3 things you need to understand about how Perpetual Contracts work, namely:

1. Leverage

One of the main features of Perpetual Contracts is the use of leverage. Traders can open positions with amounts much larger than the capital they have. This allows them to increase potential profits, but also increases the risk of loss.

2. Funding Rate

To keep the price of Perpetual Contracts close to the spot price of the underlying asset, Perpetual Contracts uses a mechanism called the "funding rate". Funding rate is a mechanism that adjusts payments between long traders and short traders to match market prices. This helps prevent significant deviations of the contract price from the spot price.

3. No Expiry Date

Perpetual Contracts have no expiration date, meaning traders can hold their positions as long as they want. This provides greater flexibility than futures contracts that have expiration dates.

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Correlation of Perpetual Contracts with Cryptocurrencies

How do Perpetual Contracts relate to cryptocurrency? The following is a detailed explanation.

1. High Volatility

The cryptocurrency market is known for its high volatility . Perpetual Contracts allow traders to take advantage of rapid and significant price movements in cryptocurrencies to make profits.

2. Easily Accessible

Perpetual Contracts can be traded on various crypto trading platforms without geographic restrictions. This allows easy access for traders from all over the world to participate in crypto asset trading 24/7.

3. High Leverage

By using leverage, traders can open large positions with relatively little capital. This allows traders to increase their profit potential, although it also increases the risk of loss.

4. Dynamic Funding Rate

The funding rate mechanism in Perpetual Contracts ensures that the contract price is always close to the market spot price, making it a more efficient trading instrument in a rapidly changing market environment.

Difference between Perpetual Contracts and Future Contracts

Future Contracts and Perpetual Contracts are two types of derivative trading instruments commonly used in financial markets, including in crypto asset trading. 

Although the two have some similarities, there are also significant differences in their working mechanisms and characteristics.

Following are the differences between futures contracts and Perpetual Contracts:

1. Expiration Date

Futures Contracts have an expiry date that is set in the future.

On the expiration date, the buyer and seller must execute the transaction in accordance with the terms of the contract.

Perpetual Contracts have no expiration date. This means traders can hold their positions as long as they want without any time limits.

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2. Payment and Settlement

Payment and settlement of a futures contract occurs on the expiration date. The buyer must pay the agreed price at the time of the contract, while the seller must deliver the underlying asset.

Payment and settlement of Perpetual Contracts may occur at any time. Payments between long and short traders are adjusted continuously through a funding rate mechanism.

3. Leverage Mechanism

Futures contracts often use high leverage, allowing traders to control large positions with relatively little capital.

Perpetual Contracts also allow the use of leverage, but the mechanism is slightly different. Leverage in perpetu contracts is often more flexible and can be adjusted by traders according to their needs.

4. Risk and Volatility

Futures contracts involve risks associated with fluctuations in the price of the underlying asset. If the price moves against a trader's position, they can suffer significant losses.

Perpetual Contracts are also subject to the same risks related to asset price fluctuations. However, because there is no expiration date, positions can be held for longer, which can increase the overall risk.

5. Flexibility and Liquidity

Futures contracts are generally more structured and organized, with trading volumes possibly higher in organized markets.

Perpetual Contracts are often more flexible and can be traded on various crypto trading platforms. The liquidity may also vary depending on the platform and trading pair chosen.

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Conclusion

Perpetual Contracts are derivative trading instruments that allow traders to speculate on price movements of an asset without having to physically own the asset. 

In the context of dynamic crypto asset markets, Perpetual Contracts have become a very popular tool for traders to take advantage of market volatility and increase their profit potential. 

However, it is important for traders to understand the risks associated with using leverage and always exercise proper risk management in their trading. 

With a proper understanding of this concept, traders can utilize Perpetual Contracts as part of their trading strategy in the ever-evolving crypto asset market.

How to Buy Crypto on Bittime

You can buy and sell crypto assets in an easy and safe way via  Bittime.  Bittime is one of the best crypto applications in Indonesia which is officially registered with Bappebti. 

To be able to buy crypto assets on  Bittime,  make sure you have registered and completed identity verification. Apart from that, also make sure that you have sufficient balance by depositing some funds into  your wallet . For your information, the minimum purchase of assets on Bittime is IDR 10,000. After that, you can purchase crypto assets in the application. 

Learn  Complete Guide How to Buy Crypto on Bittime.

Monitor price chart movements  for Bitcoin (BTC),  Ethereum (ETH ),  Solana (SOL)  and other cryptos to find out today's crypto market trends in real-time on Bittime.

Read Also:

What are Smart Contracts?

What are Cross-Chain Contract Calls?

What Are Bitcoin DApps?

DISCLAIMER : This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.