Before you start trading contracts, it’s important to understand the difference between a Futures Contract and a Perpetual Contract. Let’s look at the differences between them and where they can be traded.
Firstly, what is a Futures Contract?
A Futures Contract is simply an agreement between two parties to sell or buy an asset at a fixed price on a predetermined ‘future’ date. Imagine that two investors enter one of these contracts with the underlying asset being Bitcoin. One promises to sell Bitcoin at an agreed price while the other promises to buy it. At the time the contract is due, both of them must fulfill their promise regardless of where the price of Bitcoin is actually at. If the future price is higher than the original agreed price, the seller loses and the buyer wins. The opposite is true if the price goes down.
So, what is a Perpetual Contract?
A Perpetual Contract works much in the same way that a Futures Contract does, with one significant difference. As the name implies, a Perpetual Contract is one that does not have an expiration date.
In the context of trading on Phemex, it is important to know that traders investing in Perpetual Contracts, do not need to actually hold the underlying asset (in this case, Bitcoin). Profit can be made by correctly predicting the movement of Bitcoin prices, as these contracts are designed to mirror the price of their underlying assets (for more information on this process, view What is a Funding Rate?). Once the contract executes or closes, Phemex allows the difference in prices to be settled in either USD or BTC.
The primary benefit of Perpetual Contracts is that you are allowed to hold them indefinitely. The lack of an expiration or execution date means that even when prices move against your position, you are not immediately stuck with a losing trade. Instead, as long as you have enough funds to maintain your positions, you can continue to hold and wait until prices move in your favor again.
How can Perpetual Contracts be more beneficial than Futures Contracts?
Consider this example. Say that you are absolutely certain that the price of Bitcoin will go up. Unfortunately, you do not know how long it will take to do so. If the price has not gone up by the time your Futures Contract expires, you are stuck with a bad trade. However, with a Perpetual Contract, you can hold your position indefinitely. This way, you can maximize your chances of success.
Where can I trade it?
On the Phemex platform. Most cryptocurrency platforms do not offer perpetual contracts for trading, however Phemex, the fastest and trustworthy cryptocurrency exchange platform in the market does.
Perpetual Contracts Q&A
Is contract trading risky?
Trading perpetual contracts amplifies the outcome of any deal, this means that you can yield bigger profits. But it also means that a decrease in your commodity price will liquidate your equity and close your position much faster. It is important to note that Phemex provides you with instruments to manage your risk.
How does my position stay open?
Phemex makes use of Funding, a periodic payment exchanged every 8 hours to keep the position open, reduce basis, and tether the price back to spot price.
Visit Funding history to learn more about the funding history of perpetual contracts on Phemex.
Can perpetual contracts be settled?
No, contrary to futures contracts, there are no settlement options for perpetual contracts.
Condensing the above, the main characteristics of perpetual contracts are:
- They do not have an expiry date, which is an advantage over the futures market. Because there’s no expiry, speculative traders and investors alike can have a no-pressure trading environment where they can hedge and even hold trades as long as they want.
- The possibility for margin or leverage trading of up to 100x. Since the leverage is high, traders can open or close a position with only a fraction of their account balance. Contracts, therefore, offer the potential to make a higher return from a smaller initial outlay than investing directly in the underlying security.