1. It is actually very simple. The logic is the same as that of spot trading, except that spot trading can only achieve profits in one direction - bullish. The biggest difference between contracts and spot trading is that they can achieve profits or losses in both directions, and can use high leverage. If you are bullish (called longs), you will make money if the price goes up, and if you are bearish (called shorts), you will make money if the price goes down (conversely, you will also suffer losses).

Each position of a contract is divided into two transactions: if you are long, you need to buy first, also known as opening a long position. Regardless of the profit or loss, you need to sell to close the position, also known as closing a long position; if you are short, you need to sell first, also known as opening a short position. Regardless of the profit or loss, you need to buy to close the position, also known as closing a short position.

As for leverage, the maximum leverage of general exchange contracts is 100 times (some are 125 times, and even 500 times earlier). What does 100 times leverage mean? For example, if the current price of Bitcoin is $69,000, you only need $690 to open a position worth $69,000. You can understand it as only spending 1% of your funds to hold one Bitcoin. Because you use 100 times leverage, your gains/losses will also be magnified a hundred times. Suppose you use 100 times leverage to open a long position worth 1 Bitcoin at $69,000. When the price rises by 1% (US$69,690), your rate of return can reach 100%. On the contrary, if it falls by 1%, your position will be forced to close, which means it will explode, because you only paid 1% of the margin, and your position will actually fall by 0.9%-0.95%. Your position will be forced to close by the exchange because each transaction is subject to a handling fee.

I believe you should understand the basic logic after reading this. I have to say more because I often see people asking what is the difference between 1x contract and spot. I don’t know if the questioner has such a question. I will dare to assume that you have.

No matter how many times the leverage is, there is an essential difference between the contract and the spot. Although a 1x contract requires a margin equal to the spot price, it is not equal to the spot. Many people have a misunderstanding:

1x leverage = no margin call

Actually, it is not like that. Some people may think that if I use 1x leverage and pay the same margin as spot, it will be the same as spot and will not be liquidated. In theory, it is true. In fact, as I just said, the exchange will charge a handling fee for each transaction, and there is also a funding rate (this thing is charged three times a day), and these two fees are directly deducted from the margin. So in fact, if you don't add margin, the 1x contract will also be liquidated.

The role of the funding rate is very simple, which is to anchor the contract price to the spot price. In essence, perpetual contracts and spot are two markets. Because perpetual contracts do not require spot delivery, they are equivalent to trading pairs made by the exchange itself. If the exchange wants people to trade its own trading pairs, it must be anchored to the spot price and cannot be decoupled. Whether it is a contract or a spot, the price change logic is the same. If more people buy, the price will rise, and if more people sell, the price will fall.

When the contract price is higher than the spot price, the funding rate is positive. The party holding the long contract needs to pay the funding fee to the party holding the short contract (conversely, the party holding the short position pays the funding fee to the party holding the long contract). The funding fee is calculated as position value * funding rate. The higher the position value, the higher the funding fee. It is charged every 8 hours. If you don't want to pay the funding fee, you can only close the position before it is charged. In this way, the contract price is always close to the spot price, and the deviation will not be too large.