crypto strategy

What are cryptocurrency perpetual futures contracts?

In 1992, economist Robert Shiller proposed a cash-settled futures market called perpetual futures that do not expire or provide delivery or coverage of the traded asset in order to reduce the cost of renewal or direct holding of cryptocurrency contracts. However, these contracts are only active in the cryptocurrency markets.

In order to gain exposure to an underlying asset or index, a trader can hold a perpetual futures contract indefinitely. Since the contracts would not have a predetermined expiry date, this strategy allows the creation of futures markets for illiquid assets. Also, unlike stock futures, which are settled by delivering the asset when the contract expires, perpetual futures are always settled in cash — that is, physical delivery.

Additionally, since there is no delivery of assets, perpetual futures contracts make it easier to trade with high levels of leverage. Leverage is a trading instrument which investors can use to increase their exposure to the market by allowing them to use borrowed funds provided by the broker to make a trade or investment.

Investors can hedge (mitigate risk) and speculate (increase exposure to price movements) on cryptocurrencies with high leverage using perpetuals, which do not require taking delivery of a crypto asset and do not require rolling them over.

Essentially, perpetual futures contracts are a contract between long and short counterparties, where the long side must pay the short side an intermediate cash flow known as the funding rate, and the short side must give the long side a reward based on the futures price’s entry and exit times.

Perpetual futures’ prices are kept consistent with the market values ​​of the underlying assets they track through the mechanism of the funding rate. Funding takes place every eight hours — that is, 04:00 UTC, 12:00 UTC, and 20:00 UTC. Traders can only pay or get funding if they have a position at one of these times. The premium and interest rate make up the funding rate, which is determined based on the market performance of each instrument.

With the exception of contracts like BNBUSDT and BNBBUSD, which have interest rates of 0%, Binance Futures’ interest rate is set at 0.01% per funding interval (0.03% per day). The premium, however, fluctuates based on the price distinction between the perpetual contract and the reference price, which represents the fair value of a perpetual futures contract and is an estimate of the true value of a contract relative to its actual trading price.

Additionally, profits and losses are regularly marked to market and credited to each party’s margin account, and both parties are free to enter into the arrangement at any time. Mark-to-market valuation refers to pricing the cryptocurrency asset or any other security at the current market rate. Changes in the market value of an asset drive traders. daily profit and loss settlement.

In addition, due to the absence of staggered trading of contracts of different maturities on the exchange and the trading of a single perpetual futures contract for each underlying asset, this configuration increases the liquidity of the contract.


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