Perpetual Contracts in Cryptocurrency: What is it?
A perpetual contract (or perpetual future) is a type of cryptocurrency futures contract that does not have an expiration date. Unlike traditional futures contracts, perpetual contracts allow traders to hold their positions in the market without time restrictions.
Main characteristics and operating principles of perpetual contracts:
đ” No Expiration Date: Perpetual contracts do not require the position to be closed within a specific time frame, allowing traders to hold them for as long as they want.
đ” Spot Price Peg: To keep the contract price close to the price of the underlying asset (e.g. Bitcoin), a funding rate mechanism is used. This is a periodic fee paid by traders based on their position (long or short).
đ” Financing Mechanism: If the contract price is higher than the spot price, long traders pay a commission to short traders, and vice versa. This mechanism stabilizes the contract price by bringing it closer to the market price of the asset.
đ” High Liquidity: Perpetual contracts are popular on cryptocurrency exchanges due to their flexibility and accessibility, ensuring a high level of liquidity.
đ” Margin Trading: Most perpetual contracts support margin and leverage trading, allowing traders to take positions larger than their initial capital.
Perpetual contracts allow traders to speculate on cryptocurrency price movements with leverage and are widely used for both short- and long-term strategies.