Perpetual Contracts Definition
Perpetual contracts, also known as perpetual swaps, are a type of futures contract often used in cryptocurrency trading. Unlike traditional futures contracts, perpetual contracts do not have an expiration date, meaning they can be held indefinitely. They are designed to trade closely to the spot price of an asset, and they achieve this through a mechanism known as “funding rate”, which requires traders to pay fees to their counterparts based on the difference between the contract price and the spot price.
Perpetual Contracts Key Points
- Perpetual contracts are a type of futures contract without an expiration date.
- They are commonly used in cryptocurrency trading.
- Perpetual contracts are designed to trade closely to the spot price of an asset.
- The “funding rate” mechanism is used to keep the contract price close to the spot price.
What are Perpetual Contracts?
Perpetual contracts are a special type of futures contract predominantly used in the trading of cryptocurrencies. Unlike traditional futures contracts that have a set expiration or settlement date, perpetual contracts can be held for as long as the trader wishes, hence the term ‘perpetual’.
Why are Perpetual Contracts used?
Perpetual contracts are used for several reasons. They allow traders to speculate on the future price of a cryptocurrency without the need to own the underlying asset. This makes them particularly attractive to traders who want to take advantage of price movements without the need to manage the actual asset. Additionally, because they do not have an expiration date, traders can hold their position for as long as they want, providing greater flexibility.
Where are Perpetual Contracts used?
Perpetual contracts are predominantly used in the cryptocurrency market, on various cryptocurrency exchanges. They are particularly popular for trading Bitcoin, but are also available for other cryptocurrencies.
When are Perpetual Contracts used?
Perpetual contracts can be used at any time by traders who wish to speculate on the future price of a cryptocurrency. They are especially useful in volatile markets, where price movements can be significant.
How do Perpetual Contracts work?
Perpetual contracts work by using a mechanism known as the “funding rate” to keep the contract price close to the spot price of the underlying asset. If the contract price is higher than the spot price, long traders (those betting on a price increase) will pay short traders (those betting on a price decrease). Conversely, if the contract price is lower than the spot price, short traders will pay long traders. This exchange happens every few hours and is designed to incentivize traders to keep the contract price close to the spot price.
