1. What Are Perpetual Contracts?
Financial derivatives include these key concepts:
- Spot Trading
Pros: Direct ownership of assets, no liquidation risk, instant withdrawals.
Cons: No leverage, higher fees, less flexibility. - Spot Margin Trading
Offers 1-5x leverage. Requires collateral and interest payments for borrowing funds/coins to long or short. - Futures Contracts
Fixed-settlement-date agreements (e.g., weekly/quarterly contracts) with leverage up to 100x. Follows traditional futures pricing models. - Perpetual Contracts
No expiry or settlement. Uses funding rates to track spot prices, with leverage up to 200x. Functions like index futures with minimal margin requirements. - Options
Complex derivatives with limited liquidity in crypto. Includes European options (e.g., Deribit, OKEx) and exotic products like "Shark Fin" structured notes.
2. Pros and Cons of Perpetual Contracts
✅ Advantages
- High leverage with low capital
- No physical asset ownership needed (ideal for shorting)
- Continuous trading without rollovers
❌ Risks
- Liquidation hazards from extreme leverage
- Potential negative funding rate costs
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3. Types of Perpetual Contracts
| Type | Settlement Currency | Example | Key Feature |
|---|---|---|---|
| Linear (USDT) | Stablecoins (USDT) | BTC/USDT on Binance | Single-currency margin management |
| Inverse | Crypto (BTC/ETH) | BTC/USD on BitMEX | Requires holding base assets |
4. Key Metrics: Mark Price vs. Last Price
- Mark Price: Weighted average of spot prices across exchanges to prevent unfair liquidations.
- Last Price: Actual execution price. Exchanges use mark price for calculating PnL and liquidation triggers.
5. Margin Requirements Explained
- Initial Margin: Minimum collateral to open a position (Position Size ÷ Leverage).
- Maintenance Margin: Threshold to avoid liquidation. Falls below this triggers margin calls or forced closures.
6. Understanding Liquidation
When margin ≤ maintenance level:
- Positions are force-closed
- Loss = All collateral + fees
- Excess/shortfalls handled via insurance fund
7. Insurance Fund Mechanics
- Covers gaps when liquidated positions can’t pay counterparties.
- Surplus from liquidations boosts the fund.
- Shortfalls trigger Auto-Deleveraging (ADL).
8. Auto-Deleveraging (ADL)
Prioritizes closing profitable high-leverage positions to cover system losses. Common on exchanges like BitMEX.
9. Funding Rates Demystified
| Scenario | Payer | Purpose |
|---|---|---|
| Rate > 0 (Premium) | Longs pay shorts | Corrects upward price deviation |
| Rate < 0 (Discount) | Shorts pay longs | Adjusts for downward skew |
Calculated every 8 hours based on:
- Interest Rate (e.g., 0.03% on Binance)
- Premium Index (Contract vs. Spot spread)
10. Realized vs. Unrealized PnL
Unrealized PnL: Live profit/loss based on mark price:
- Long formula:
(1/Entry − 1/Last Price) × Size - Short formula:
(1/Last Price − 1/Entry) × Size
- Long formula:
- Realized PnL: Locked-in profit after closing, minus fees/funding.
FAQ Section
Q: How often are funding rates applied?
A: Typically every 8 hours—3x daily.
Q: What happens during extreme volatility?
A: Exuses mark prices to prevent unnecessary liquidations.
Q: Is inverse contract exposure better for crypto holders?
A: Yes—profits compound if the collateral asset appreciates.
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