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  3. Future Contracts VS Perpetual Contracts

Future Contracts VS Perpetual Contracts

Bitcoin Contracts

This article will help you quickly understand the main differences between Future Contracts and Perpetual Contracts.

What are Future Contracts?

A Future Contract is simply an agreement between two parties to sell or buy an asset at a fixed price on a predetermined ‘future’ date. Let’s imagine that two investors enter one of these contracts with the underlying asset being Bitcoin. One of them promises to sell Bitcoins at an agreed price while the other one promises to buy them. At the time that 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.

What are Perpetual Contracts?

A Perpetual Contract works much in the same way that a Future Contract does. However, there is one significant difference. As the name implies, a Perpetual Contract is one that does not have an expiration date.

To better understand this concept, let’s look at it in the context of how we would trade these on an exchange such as Phemex.

First of all, it is important to know that investors trading Perpetual Contracts, do not actually need to hold the underlying asset (in this case Bitcoins). They can still profit by predicting the movement in Bitcoin prices because these contracts are designed to mirror the prices of their underlying assets. Once the contract is to be closed, Phemex allows the difference in prices to be settled in both USD and BTC.

How can Perpetual Contracts be more beneficial than Future Contracts?

Consider this example. Say that you are absolutely certain that the price of Bitcoin will climb. Unfortunately, you do not know how long it will take to do so. If the price did not climbed by the time your Future Contract expired, 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. In addition, at Phemex, you can trade Perpetual Contracts with up to 100x leverage.

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Updated on March 30, 2020

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