March 5, 2021

What are Perpetual Contracts?

Perpetual contracts are one of the many different types of contracts traders can handle in the market. They are a type of derivative that follows the price of an underlying asset but it does not have an expiry date.

Perpetual contracts are one of the many different types of contracts traders can handle in the market. They are a type of derivative that follows the price of an underlying asset but it does not have an expiry date.

Perpetual contracts can be held for as long as you desire due to the fact that they don’t expire. Investors can sell them at any moment on some of the most popular trading platforms available. In general, the price of perpetual contracts is very similar to the price of the spot market. 

One of the main benefits of  perpetual contracts is related to the fact that traders can trade them with leverage and get a larger exposure to virtual currencies. Perpetual contracts require investors to understand the index price and the mark price. 

The index price is the spot price of the underlying asset. It can usually be an average price. Instead, the mark price calculates the funding rate and it also provides information about the index price. 

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What are Futures Contracts?

Futures contracts are also derivatives that allow an investor to purchase or sell a specific contract for a determined price and date. The contracts usually follow a commodity, a cryptocurrency or a stock. 

Investors can speculate with the price fluctuations of the underlying asset or financial instrument. Additionally, it is possible to use leverage to trade futures, making it a more interesting tool than traditional spot markets. 

Furthermore, another characteristic of futures contracts is related to how users can hedge against the price movements of the underlying asset. It usually works for companies that must have access to a commodity that experiences price fluctuations. 

It is worth mentioning that as for Perpetual Contracts, traders are not handling the underlying asset. They are purchasing a contract that derives its price from another asset. 

If we think of the cryptocurrency market, a Bitcoin perpetual contract, would be a contract that follows the price of Bitcoin (very close to the spot price) and that allows us to trade with leverage and get exposure to the digital currency. 

Nevertheless, we do not need to be worried about storing BTC, handling the virtual currency or anything similar. We just handle contracts. 

What are Crypto Futures?

Crypto futures are futures contracts that can be traded in the cryptocurrency market. They can be futures contracts or perpetual contracts. Thus, investors are able to select whether they trade futures contracts (which expire at a predetermined date and for a pre-arranged price) or if they trade perpetual contracts. 

Perpetual contracts are the most common option. They can be traded with leverage and they have a similar price to the spot market. Thus, it can be a great way for users to get exposure to the market and trade with leverage. 

In the cryptocurrency market, futures contracts are used mostly for speculation rather than hedging against volatility. Investors that want to hedge are those that need to have a commodity for productive reasons and cannot afford to pay a higher price in the future. Thus, they purchase futures contracts and reduce the impact of a price fluctuation in the future. 

Usually, digital assets are traded for speculation. There are no large industries or economic activities that require Bitcoin (BTC) or other virtual currencies in order to produce goods and services. However, there might be some companies that could use futures to hedge against volatility. 

Where Can I Trade Crypto Futures?

There are different cryptocurrency trading platforms that allow users to trade with leverage. A crypto futures exchange is a platform that offers investors the possibility to handle both perpetual and futures contracts. 

Some of the most popular crypto trading platforms already offering perpetual contracts and other crypto futures include Binance Futures, ByBit and also BitMEX. Binance is now one of the largest exchanges and it is offering a wide range of services to users.

ByBit is a relatively new platform that has been expanding in recent months and that is challenging both BitMEX and Binance Futures in terms of volume. BitMEX is the most popular platform to trade futures contracts. The exchange was released many years ago and it was known as the exchange for investors that wanted to use leverage. 

Other platforms are also offering users crypto futures. But the aforementioned platforms are the most popular exchanges where trading futures are currently available. If you want to trade digital assets and use leverage, perpetual contracts are one of the best options right now in the market. 

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