Perpetual Futures Explained for Traders

Perpetual futures are a type of financial derivative that allows traders to speculate on price movements without having to worry about expiration dates.

These contracts are designed to be perpetual, meaning they can be traded indefinitely, and are typically settled in cash rather than physical delivery of the underlying asset.

One key advantage of perpetual futures is that they offer traders the ability to maintain a continuous position in the market, without having to close and reopen positions every time a contract expires.

This can be particularly useful for traders who want to stay long-term invested in a particular asset or market, without having to worry about the complexities of physical delivery.

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Perpetual futures are a type of financial instrument that allows you to trade with leverage, but without the need for a physical delivery of the underlying asset. This is a key difference from traditional futures markets.

In a perpetual futures market, trades are not settled instantly, but rather at a specified time in the future. This means that you're trading a contract representation of the asset, rather than the asset itself.

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Perpetual futures contracts can be settled in cash, eliminating the need for physical storage and transportation of commodities like gold or wheat. This reduces carrying costs and makes the market more efficient.

The price of a perpetual futures contract can vary depending on how far away the settlement date is. The longer the time gap, the higher the carrying costs and potential price uncertainty.

To trade perpetual futures, you'll need to understand the key concepts involved, including the funding rate, trading positions, initial margin, and maintenance margin. These mechanisms enable sustainable leverage, timely payouts, and accurate settlements.

Here are the key concepts to keep in mind:

Liquidation is a risk management mechanism implemented to safeguard traders' capital. It's triggered when a trader's collateral falls below the maintenance margin, and their position is automatically closed by the platform.

If the value of your collateral falls below the maintenance margin, your futures account may be subject to liquidation. The liquidation price changes according to the risk and leverage of each user, based on their collateral and net exposure.

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To avoid liquidation, you can either close your positions before the liquidation price is reached or add more funds to your collateral balance, causing the liquidation price to move further away from the current market price.

The funding rate, on the other hand, is a periodic payment between long and short position holders. If the perpetual futures price is above the spot price, long position holders pay the short position holders, and vice versa.

Funding rates are used to keep the price of a contract close to the spot price of the underlying asset and prevent significant divergences.

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Initial margin is the minimum value you must pay to open a leveraged position, acting as collateral. This amount is typically a percentage of the total order, such as 10% in the example of buying 1,000 BNB with an initial margin of 100 BNB.

The initial margin amount is determined by factors such as the asset's volatility, liquidity, and leverage chosen. Higher leverage often requires a larger initial margin, which can be a significant amount.

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To give you a better idea, consider this: buying 1,000 BNB at 10x leverage requires an initial margin of 100 BNB. This is a substantial amount of collateral, and it's essential to understand the risks involved.

The initial margin is used to back your leveraged position, and it's what keeps you from going into a loss. If your position moves against you, the initial margin will be used to cover the losses, and you may be required to deposit more funds to maintain the position.

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Liquidation is a process that occurs when the value of your collateral falls below the maintenance margin, potentially leading to the liquidation of your futures account.

The liquidation price changes according to the risk and leverage of each user, taking into account their collateral and net exposure. The larger the total position, the higher the required margin.

To avoid liquidation, you can either close your positions before the liquidation price is reached or add more funds to your collateral balance.

The funding rate mechanism is a periodic payment between long and short position holders.

If the perpetual futures price is above the spot price, long position holders pay the short position holders, and vice versa.

This mechanism is used to keep the price of a contract close to the spot price of the underlying asset.

It prevents significant divergences between the two prices, ensuring a more stable market.

The funding rate is a crucial aspect of perpetual futures, as it helps maintain market balance and prevents price manipulations.

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The mark price is an estimate of the true value of a contract, calculated based on the index price and funding rate, and is essential for preventing unfair liquidations.

This calculation helps ensure that the funding mechanism and liquidation calculations are based on a reliable, objective price reference, mitigating the impact of market volatility and potential manipulation.

The mark price is used to determine potential liquidations and unrealized profit and loss (PnL), and is a crucial part of the "unrealized PnL" calculation.

Unrealized PnL, which is constantly changing, is the primary driver for liquidations, and the mark price ensures that its calculation is accurate and just.

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The maintenance margin is the minimum amount of collateral you must hold to keep trading positions open. If your margin balance drops below this level, you'll either receive a margin call or be liquidated.

Most cryptocurrency exchanges will liquidate your positions if your margin balance falls below the maintenance margin. This is a dynamic value that changes according to market price and your account balance.

The maintenance margin serves as a form of security, ensuring you have sufficient funds to cover potential losses. Traders must maintain a minimum margin level to keep their positions open.

If the margin falls below the maintenance margin level, it triggers a margin call, prompting you to either add more collateral or reduce your position size to meet the requirement.

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The mark price is an estimate of the true value of a contract, known as the fair price, when compared to its actual trading price, or last price. This calculation prevents unfair liquidations that may happen when the market is highly volatile.

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The mark price is based on the index price and the funding rate, and it's an essential part of the "unrealized PnL" calculation. This means it plays a crucial role in determining potential liquidations and unrealized profit and loss.

The mark price represents the fair valuation of the perpetual futures contract at any time. It's calculated using a combination of the underlying spot price and an index price.

Both the index price and the mark price are measured to help prevent market manipulation and sudden liquidations. The mark price is a reliable, objective price reference that mitigates the impact of market volatility and potential manipulation.

The mark price is used to determine potential liquidations, which helps to prevent unfair liquidations that can occur in highly volatile markets. By using the mark price, decentralized perpetual futures platforms can ensure a fair and reliable funding mechanism.

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PnL stands for profit and loss, and it can be either realized or unrealized.

Your PnL is unrealized when you have open positions on a perpetual futures market, meaning it's still changing in response to market moves.

Realized PnL refers to the profit or loss that originates from closed positions, and it has no direct relation to the mark price.

The unrealized PnL, on the other hand, is constantly changing and is the primary driver for liquidations.

The mark price is used to ensure that the unrealized PnL calculation is accurate and just.