Perpetual contracts offer traders an edge over futures contracts, as they provide greater leverage and there is no requirement to exchange the underlying asset.
Futures contracts, a derivative instrument, provide payment and delivery at predetermined future dates. In contrast to spot contracts that are for immediate buying and selling, perpetual contracts (which is also a type of futures contract) have no expiration date or fixed settlement time.
Traders can maintain long or short positions indefinitely if the maintenance margin stays at an adequate level. Maintenance margin is a minimum amount of collateral that traders must have in order to keep their trading positions open.
Let us illustrate the contrast between traditional futures contracts and perpetual contracts with a pertinent example. If Alice buys a January crude oil futures contract at $70 per barrel, then she is required to settle that position before expiration in spite of the price variation. Conversely, if Alice opts for a perpetual contract instead; she accepts to purchase crude oil at some future point yet unspecified time frame—with an assured rate of $70 per barrel—and can choose to leave her spot whenever desirable while being able to get back her margin money.
When the contract price rises above BTC/USD, users holding short positions are compensated with a funding rate that is then charged to those who have long positions. This enables the adjustment of the contract’s cost back in line with BTC/USD.
BitMEX, a leading cryptocurrency exchange specializing in derivatives trading, has pioneered the perpetual contract: XBTUSD (Perpetual Bitcoin Contract). Through this agreement, traders can create leveraged positions that adjust their worth according to variations of an index price denominated by the US Dollar spot rate of Bitcoin (BTC) which is calculated using data from several different crypto exchanges.
Index price is a reflection of the average value of an asset, which is determined by both the magnitude and influence that major spot markets have on their traded prices. This allows for those trading prices to be equivalent or almost identical to what they would receive in person at a physical market.
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