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Perpetual Contracts Explained

Wisebitcoin 2021-04-21

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Perpetual Swaps have quickly gained popularity as the best way to trade cryptocurrency. If you’re a fan of trading and the stellar opportunities it presents, you might be familiar with Perpetual Swaps. However, if you’re new to trading and want to know more about it, read on.

In this article, we’ll cover everything you need to know about Perpetual Swap contracts as well as some particulars of Wisebitcoin. If you’re a newbie trader, you might find this guide useful, so stick till the end. 

 

What is a Perpetual Swap Contract? 

Before discussing perpetual swap contracts, we need to understand futures contracts.

A futures contract is a standardized agreement to buy or sell something at a predetermined price at a specified time in the future. The asset transacted is typically a commodity or financial instrument. At the expiry date, the buyer has the option of executing the contract but does not have to.

Perpetual swaps are similar, in that they are agreements to buy or sell something in the future, but there is no settlement date and you can keep your position open indefinitely.

Furthermore, the price of the swap is closely pegged to the asset in question to balance buyer and seller demand for the asset. This helps manage volatility while allowing investors to benefit from the same speculation that drives futures trading.

There are many benefits of perpetual swaps, including the following:

  • You do not have to constantly manage and re-establish trading positions since your positions never expire as they do with regular futures contracts.
  • You can invest in and gain exposure to an asset without trading it; you simply have to open a perpetual position that is pegged to the asset you are interested in.
  • You can leverage your positions to gain more exposure, up to X100 as is possible with Wisebitcoin. 

 

As mentioned above, due to pegging with an underlying asset, perpetual contracts are often traded at a price equal or similar to spot markets. However, during extreme market conditions, the mark price may deviate from the spot market price. Still, the biggest difference between the traditional futures and perpetual contracts is the ‘settlement date’ of the former.

 

Differences between Perpetual and Future Contracts

If you want to bet on Bitcoin's rising price, you come across various options. One of the most used methods is to opt for a futures contract. However, futures contracts have an expiry date. For traders who want to leverage derivatives, but do not want to complicate it with expiration dates, Perpetual Swap Trading is your one-stop derivative. 

Along with a no expiry feature, Perpetual Swap does not have an underlying asset involved, which helps in gaining exposure in asset movements without requiring to hold or borrow it. The distinguishing factor of Perpetual Swaps is they should always be pegged to the underlying track. Perpetual design contracts are traded at a price close to the price of the underlying spot. The proximity of the perpetual price to the spot price is achieved through funding. With the help of a funding rate mechanism, you can balance the buyer and seller demand so that the swap’s price falls in line with the underlying asset.

 

Funding Rate and Fees

Swap gaps are filled with funding fees, which basically go about as counter-balances, incentivizing the lesser-known side of the market. These expenses depend on the funding rate, which is determined by the value difference between a perpetual swap contract and the asset’s spot price tracked by the contract. 

For instance, if a perpetual swap contract is trading over the underlying spot value, there’s a positive funding rate. This means the long position holders need to pay a subsidizing expense to the short position holders however long they keep their positions open. If on the contrary, the funding rate goes negative, the short position holders pay an expense to the long position holders. 

Without such a mechanism, there would be no incentive for traders to conflict with the trend and open positions, leading to a trajectory of perpetual swap positions — nor would the swap be secured to the underlying asset it should follow.

 

Perpetual Swap Trading with Wisebitcoin 

Contract Specifications 

Wisebitcoin selects the market prices of 3 or more major exchanges as the weighted index constituents, to ensure the spot index price accurately reflects the spot market price of each token. To handle abnormal situations, weights are placed in the order of the exchange and the coin.

 

Auto Deleveraging 

Leveraging is synonymous with borrowing money in trading. Before making a trade where they expect to gain profits, professional traders usually increase the amount of money they put into it by borrowing funds. This is an attempt to maximize their expected earnings if they expect the resulting profits to be greater than the interest on the loan.

As a crypto derivatives exchange that puts traders first, Wisebitcoin offers the world’s lowest trading fees, highest verified security, 24/7 live support, and, more importantly, up to 100x leverage – all without any KYC. You can use the platform to trade BTC, ETH, XRP, BCH, LTC, EOS, and BNB perpetual futures contracts.

On the other hand, Auto De-leveraging is when Wisebitcoin will take over your remaining position in case it is liquidated. If your position cannot be executed at the market’s liquidation price along with insufficient insurance funds, the Auto-Deleverage (ADL) mechanism will kick in. ADL will deleverage users with positions on the opposite side, and the deleverage queue is based on leverage and PnL. This feature is meant to protect traders as well as the overall market.

 

Risk Limit 

In order to prevent market manipulation, Wisebitcoin limits the users’ opening and closing prices. Risk Limit is used to minimize a user’s position risk. Wisebitcoin users are required to choose a risk limit from our available margin. A strict price limit will be triggered in two cases. 

  • When opening long or closing short, if the highest bid quotation is lower than the buy order price,  
  • When opening short or closing long, if the lowest ask quotation is higher than the sell order price. 

 

Wisebitcoin offers liquid derivatives products in the market which includes cryptocurrency futures, options, and perpetual swaps. Diving deeper into perpetual swaps, Wisebitcoin offers both coin-margin and USDT-margin in cryptocurrency varieties, including BTC, ETH, LTC, and more. Traders can leverage up to 100x depending on the perpetual swap position tiers Wisebitcoin provides. 

Wisebitcoin also uses a marked price for reference to provide a reliable trading experience for users. The marked price is based on underlying assets used for calculating unrealized profits and losses of users. This is to avoid unnecessary liquidation scenarios in case of highly volatile market conditions.

To know more about the rules of Perpetual Swap Trading and kickstart your own process, click here and create your own trading account.