Perpetual Futures Contracts: Definition, How it Works, and Trading Strategies

Bittime - Perpetual futures contracts are a trading instrument that is becoming increasingly popular in the cryptocurrency market. This instrument offers high flexibility and liquidity for traders to take advantage of crypto asset price movements without having to physically own the asset. So, what are perpetual futures contracts? And how it works and effective trading strategies to take advantage of it.

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What are Perpetual Futures Contracts?

Perpetual futures contracts, or often referred to as perpetual swaps, are a type of derivative contract that do not have a fixed expiration date. These contracts are designed to track the spot price of the underlying crypto asset as much as possible and offer a way to go long (buy) or short (sell) on that crypto asset.

One of the main features of perpetual futures contracts is the existence of a financing mechanism or variable interest rate financing to keep the contract price close to the spot price. This means that unlike traditional futures contracts, perpetual futures contracts have no expiration date and can be traded continuously.

How Perpetual Futures Contracts Work 

Perpetual futures contracts work based on the principle of a futures contract, namely two parties agree to trade at an agreed price in the future. The following is a complete explanation.

1. No Expiry Date

The main difference between perpetual futures contracts and regular futures contracts is that they do not have a specified expiration date. This allows traders to hold their positions as long as they wish, without having to worry about contract rollovers or position liquidation.

2. Financing Mechanism

To keep the contract price close to the spot price, perpetual futures contracts use a financing mechanism. This financing is calculated based on the difference between the contract price and the spot price, and is traded every few hours to ensure balance.

3. High Liquidity

Because they have no expiration date and offer high flexibility, perpetual futures contracts often have very high liquidity. This makes it a popular choice among traders looking for fast and efficient trading opportunities.

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Strategies for Trading Perpetual Futures Contracts

1. Arbitrage

One of the popular strategies in trading perpetual futures contracts is arbitrage. This strategy involves taking advantage of the price difference between the futures contract and the spot price to generate risk-free profits. Traders can take advantage of this price gap by opening a long position on an exchange with a lower spot price and a short position on an exchange with a higher futures price.

2. Hedging

Perpetual futures contracts can also be used as a tool to protect your portfolio against the risk of undesirable price movements. For example, if you have a portfolio of crypto assets that are sensitive to price volatility, you can use perpetual futures contracts to open short positions that will offset potential losses from your portfolio.

3. Trading Directional

The most common trading strategy in perpetual futures contracts is directional trading, that is, traders try to predict the direction of crypto asset price movements and take long or short positions according to their analysis. Technical and fundamental analysis can be used to identify potential trading opportunities.

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

Conclusion

From the explanation above, it can be concluded that perpetual futures contracts are an attractive trading instrument that offers high flexibility and liquidity for crypto traders. With a good understanding of how they work and an effective trading strategy, you can take advantage of the trading opportunities offered by perpetual futures contracts and increase your success in this dynamic cryptocurrency market. We hope this article provides useful insights and helps you start your trading journey with confidence.

How to Buy Crypto from 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 at 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 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.

Monitor graphic movement of Bitcoin (BTC) price, Ethereum (ETH), Solana (SUN) and other cryptos to find out today's crypto market trends in real-time on Bittime.

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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.