What is a perpetual contract?

Definition of Perpetual Contracts

A perpetual contract is a type of cryptocurrency derivative contract calculated, traded, and settled based on the price of an underlying asset. Unlike traditional financial contracts, perpetual contracts have no expiration date, allowing settlement at any time. This makes them a distinctive financial instrument in the crypto market.

The core difference between perpetual contracts and traditional futures contracts is the absence of a fixed settlement date for perpetuals. Investors can hold positions indefinitely, aligning with their trading strategies and market outlook, without worrying about forced liquidation due to contract expiration. From a trading perspective, perpetual contracts closely resemble spot trading, enabling investors to flexibly go long (buy) or short (sell) based on their market view.

Key Position Features of Perpetual Contracts

Perpetual contract positions remain open as long as they do not trigger the forced liquidation mechanism (commonly called “liquidation”). This feature provides investors with the potential for long-term position holding, enabling better capture of market trends.

Importantly, perpetual contracts generally employ leverage. Leverage allows investors to control a larger notional contract value with less capital, amplifying potential returns. However, this also increases risk exposure. Investors must manage positions and risk carefully, set appropriate stop-loss levels, and avoid forced liquidation losses caused by market volatility.

Perpetual Contracts vs. Futures Contracts

Perpetual contracts are an innovative financial product that evolved from traditional futures contracts. Both are derivatives, but they differ significantly. The key distinction: perpetual contracts have no expiration or settlement date, making their trading mechanism similar to margin spot markets.

Regarding pricing, perpetual contract prices typically track the index price of the underlying asset. This price anchoring relies on the funding rate mechanism. When the contract price diverges from the spot price, the funding rate incentivizes long and short traders to bring the contract price back in line. This design ensures relative price stability and creates opportunities for arbitrage.

Trading Advantages of Perpetual Contracts

Perpetual contracts are particularly well-suited for long-term position strategies. Without a settlement date, investors can hold positions based on their long-term market perspectives, eliminating the need for frequent contract rollovers required with traditional futures. This reduces trading costs and minimizes slippage losses from rolling contracts.

In practice, as long as a position is not force-liquidated due to insufficient margin, it can remain open indefinitely. Similarly, pending orders will stay active until filled or canceled by the investor. This flexibility makes perpetual contracts a vital tool for professional traders and institutional investors engaging in trend trading or hedging.

Many leading cryptocurrency exchanges offer perpetual contract trading, supporting major cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), and Tether (USDT). These platforms generally provide strong liquidity and tight spreads, delivering an efficient trading experience for investors.

FAQ

What are the differences between perpetual contracts and traditional futures?

Perpetual contracts have no expiration date, so traders can hold positions indefinitely. Traditional futures have specific settlement dates and require positions to be closed before expiration. Perpetual contracts use a funding rate mechanism for price stability, while traditional futures rely on supply and demand.

What is the funding rate in perpetual contracts? How is it calculated?

The funding rate is a recurring payment mechanism between long and short positions, designed to keep the contract price aligned with the spot price. The formula: Funding Rate = Base Rate + Premium Index × Position Ratio, settled daily. When the rate is positive, long position holders pay the fee.

What does leverage multiplier mean in perpetual contracts? What are the risks?

The leverage multiplier indicates how much larger your trade size can be relative to your capital. Higher leverage increases both potential gains and losses. High leverage amplifies the effect of market movements on your P&L, significantly raising risk exposure.

What is forced liquidation and how can you avoid it in perpetual contracts?

Forced liquidation occurs when an exchange automatically closes a position because losses exceed the margin. To avoid forced liquidation, maintain sufficient margin, manage leverage prudently, set stop-loss orders, and regularly monitor position risks.

What are the advantages and disadvantages of perpetual contracts versus spot trading?

Advantages of perpetual contracts: access to leverage, the ability to short, higher trading volumes, and lower costs. Disadvantages: higher risk, funding fees, potential for forced liquidation. Spot trading advantages: straightforward operation, no forced liquidation risk. Disadvantages: no leverage, only long strategies, and limited trade size.

How do you set stop-loss and take-profit orders for perpetual contracts?

For perpetual contracts, set your stop-loss 2% below the support level. For take-profit, use a three-tier strategy: close 30% at a 6.6% gain, set a trailing stop to close 50%, and close the remaining 20% at 1% below the resistance level. Dynamically adjust stop-loss using ATR (Average True Range) to ensure no single trade loses more than 2% of your account.

Are perpetual contracts suitable for beginners? What should they be aware of?

Perpetual contracts are not ideal for beginners. Key considerations: high risk due to leverage, start with small amounts, learn risk management and stop-loss strategies, control position sizes to avoid liquidation, and understand the funding rate mechanism. Gain experience before trading.