Have you ever wanted to speculate on the future prices of coins and tokens without the hassle of directly owning it or dealing with expiry dates? Enter perpetual futures contracts — crypto derivatives that simplify the futures trading experience by doing away with spot ownership and settlement dates. While these innovative financial instruments offer just that, they're ultimately risky and require experience in crypto trading before diving in.
Interested in learning more about perpetual futures? This in-depth guide will explore the world of perpetual futures, explaining their mechanics, advantages, and the factors to consider before starting in this exciting and risky avenue of trading.
What are perpetual futures?
Perpetual futures are a type of cryptocurrency derivative that allows traders to take long or short positions on an underlying asset. Like expiry futures, they offer traders additional flexibility, such as leverage and the ability to settle contracts without owning the underlying asset.
The primary difference between expiry futures and perpetual futures is the lack of an expiry date. Expiry futures contracts have a set expiry date, while perpetual futures can continue indefinitely, provided traders have sufficient margin to cover losses and avoid liquidation.
Why are perpetual futures and swaps so popular?
Perpetual futures have become a popular financial instrument for a few key reasons:
Flexibility: The biggest advantage is their lack of expiry. Unlike traditional futures contracts and derivatives that have a set date to settle, perpetual futures can be held indefinitely. This grants crypto traders more flexibility and the ability to stay in a position as long as they believe the market will move in their favor.
Liquidity: Perpetual futures contracts tend to be highly liquid. This means there are usually many buyers and sellers on the market, allowing traders to enter and exit positions quickly and easily without significantly affecting the price.
Leverage: Perpetual futures markets often allow for high leverage, which can amplify gains for traders. This can be attractive to traders looking to potentially make larger gains on their scalps and trades.
Hedging: While primarily used for speculation, perpetual futures can also be used for hedging other holdings. For instance, someone holding cryptocurrency can use perpetual futures to hedge against potential price drops.
Risks of trading perpetuals
Unfortunately, as with all forms of derivative trading, perpetual futures can also be extremely risky. Here are some risks worth highlighting:
The high leverage available with perpetual futures can be risky, as it can lead to significant losses if the market moves against you.
The funding fee mechanism used in perpetual swaps to keep the price close to the underlying asset can add complexity for some traders.
Overall, the flexibility, liquidity, and potential for leverage make perpetual futures attractive to a wide range of traders, particularly in the cryptocurrency market. However, it's still important to understand the risks involved before diving into trading crypto perps.
Perpetual futures vs expiry futures
One question you might have regarding perpetual futures is how they differ from their expiry futures counterpart. Here's a table summarizing the key differences:
Feature | Perpetual Futures | Expiry Futures |
|---|---|---|
Expiry date | No | Pre-determined |
Funding fee mechanism | Cash settlement | Physical delivery (usually) or cash settlement |
Position management | Can be held indefinitely | Requires rolling over to new contracts before expiry to maintain a position |
Expiry date
The primary difference between expiry futures and perpetual futures is the lack of a settlement date. Expiry futures contracts have a pre-determined expiry date that's set from the get-go, while perpetual futures can continue indefinitely, provided traders have sufficient margin to cover losses and avoid liquidation.
Funding fee mechanism
The second difference between expiry futures and perpetual futures is the use of funding fees to balance prices. Expiry futures prices automatically converge with the underlying spot price as the expiry date approaches, but perpetual futures don't have such a mechanism.
This gap is filled with funding fees, which act as counterweights and incentivize the less popular side of the market. The funding rate, which is calculated by comparing the price difference between a perpetual swap contract and the underlying asset's spot price, determines the amount of the fee.
For instance, if a perpetual swap contract is trading above the underlying asset's spot price, the funding rate becomes positive, meaning long position holders must pay a funding fee to short position holders. Conversely, when the swap is priced lower than the underlying spot price, the funding rate becomes negative, and short position holders pay a fee to long position holders.
Without funding fees, there would be no incentive for traders to counter the trend and open positions, nor would a swap be anchored to the underlying asset.
Position management
Unlike perpetual futures contracts that can be held indefinitely by speculative traders, expiry futures require rolling over because of their pre-determined expiry date. This means closing out your existing position in the expiring contract and simultaneously opening a new position in a contract with a later expiry date. This process is called "rolling over" futures contracts and is crucial to maintaining your market exposure if you believe the price trend will continue beyond the current contract's expiry.
However, rolling over futures contracts can incur additional transaction costs and may introduce slippage, which is the difference between your intended price and the actual execution price due to market movements between the closing and opening of the new position.
Put simply, expiry futures are more traditional and involve owning the underlying asset at expiry, while perpetual futures are designed for ongoing speculation without expiry hassles.
OKX perpetual futures
Interested in giving perpetual futures trading a go? OKX offers some of the most liquid derivative products in the market, including cryptocurrency expiry futures, options, and perpetual futures. OKX offers both coin-margined and USDT-margined perpetual futures for various cryptocurrencies, including BTC, ETH, LTC, and more.
To get the most out of every trade, users can use up to 125x leverage while trading our perpetual futures contracts. This depends on OKX perpetual swap position tiers, with lower leverage available for higher contract trading. When it comes to the use of leverage, traders must also consider the overall margin ratios. These are both listed on the position tiers page. From opening a position with the maximum leverage available to ensuring account balances are above the minimum amount required to avoid liquidation, these margin ratios will be handy if you're intending to lock in your gains with each trade without being forcefully liquidated because of circumstances outside your control.
From a trading point of view, liquidations mid-trade can sometimes feel unfair because of sudden price fluctuations. Fortunately, OKX uses a mark price for reference to provide a reliable trading experience that avoids unnecessary liquidations in highly volatile market conditions. Based on underlying indexes, this mark price is used to calculate users' unrealized gains and losses.
Settlement-wise, OKX perpetual futures are typically settled daily, but with the introduction of the Unified Account feature, the platform has started offering real-time settlement for perpetual futures, expiry futures, and options contracts. Trading on OKX incurs trading fees, and users are encouraged to review the trading fees explainer for more information.
The final word and next steps
Perpetual futures are an attractive option for traders looking for flexible and reliable derivatives. OKX offers a range of perpetual futures with varying leverage options and real-time settlement, making it a top choice for traders in the crypto space. Ready to get started? Check out our extensive perpetual futures market today.
Interested to learn more about trading perpetual futures? Read our guide that highlights the different fees involved with crypto futures. Alternatively, you can also check out our article that covers the different Bitcoin derivatives you can trade with us.
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