Perpetual contracts are a type of derivative in the cryptocurrency and blockchain space that allow traders to speculate on the price of an asset without owning it. Unlike traditional futures contracts, perpetual contracts do not have an expiration date, enabling traders to hold positions indefinitely. These contracts are widely used in crypto trading due to their flexibility, high leverage options, and the ability to profit from both rising and falling markets.
What Is Perpetual Contracts?
Perpetual contracts are financial instruments that derive their value from an underlying asset, such as Bitcoin, Ethereum, or other cryptocurrencies. They are similar to futures contracts but differ in one key aspect: they do not have a set expiration or settlement date. This means traders can keep their positions open as long as they meet the margin requirements.
These contracts are typically traded on cryptocurrency exchanges and are settled in stablecoins like USDT or the underlying asset itself. Perpetual contracts use a mechanism called “funding rates” to ensure their prices remain closely aligned with the spot market price of the underlying asset.
Who Uses Perpetual Contracts?
Perpetual contracts are primarily used by cryptocurrency traders and investors who seek to profit from price movements without owning the underlying asset. The key groups include:
- Retail Traders: Individuals looking to speculate on short-term price movements with leverage.
- Institutional Investors: Hedge funds and trading firms using perpetual contracts for hedging or arbitrage strategies.
- Market Makers: Entities providing liquidity to exchanges by actively trading perpetual contracts.
- Crypto Enthusiasts: Users who want exposure to crypto price movements without the complexities of managing wallets or custody.
When Did Perpetual Contracts Become Popular?
Perpetual contracts gained significant popularity in the cryptocurrency market around 2016, when BitMEX, a leading crypto derivatives exchange, introduced them. Their unique structure and flexibility quickly attracted traders, especially during the crypto bull markets of 2017 and 2020-2021. As the crypto market matured, other exchanges like Binance, Bybit, and FTX also began offering perpetual contracts, further driving their adoption.
Where Are Perpetual Contracts Traded?
Perpetual contracts are traded on cryptocurrency exchanges that specialize in derivatives. Some of the most popular platforms for trading perpetual contracts include:
- Binance Futures
- Bybit
- BitMEX
- FTX (prior to its collapse in 2022)
- OKX
These exchanges provide the infrastructure for perpetual contract trading, including order books, leverage options, and risk management tools. Most of these platforms operate globally, though access may vary depending on local regulations.
Why Are Perpetual Contracts Important?
Perpetual contracts play a crucial role in the cryptocurrency ecosystem for several reasons:
- Price Speculation: They allow traders to profit from both upward and downward price movements without owning the underlying asset.
- Leverage: Traders can amplify their exposure to price movements using leverage, increasing potential profits (and risks).
- Liquidity: Perpetual contracts are among the most liquid instruments in the crypto market, enabling efficient trading.
- Hedging: Investors can use perpetual contracts to hedge against price volatility in their crypto holdings.
- Market Efficiency: The funding rate mechanism helps align perpetual contract prices with spot market prices, contributing to overall market stability.
How Do Perpetual Contracts Work?
Perpetual contracts function through a combination of mechanisms that ensure their efficiency and alignment with the spot market:
- Leverage: Traders can open positions with a fraction of the contract’s value, using leverage ratios that range from 1x to 125x, depending on the exchange.
- Funding Rates: To keep the contract price close to the spot price, exchanges use funding rates. These are periodic payments between long and short position holders, based on the difference between the contract price and the spot price.
- Margin Requirements: Traders must maintain a minimum margin to keep their positions open. If the margin falls below the required level, the position may be liquidated.
- Mark Price: Exchanges use a “mark price” (derived from the spot price) to calculate unrealized profits and losses, reducing the risk of manipulation.
To trade perpetual contracts, users typically deposit collateral (e.g., USDT or Bitcoin) into their exchange account, choose their desired leverage, and open a long or short position based on their market outlook. The position can be closed at any time, allowing traders to lock in profits or cut losses.
By combining flexibility, leverage, and liquidity, perpetual contracts have become a cornerstone of the cryptocurrency derivatives market, attracting both retail and institutional participants.
