A perpetual contract is a financial derivative that enables investors and traders to go long or short on cryptocurrencies (or other assets). In contrast to trading the underlying asset directly, perpetuals offer leverage and a simple way of shorting an asset, enabling traders to profit from bull or bear markets.
Trading perpetuals contracts is similar to trading futures, except that with perpetuals the contracts never expire and represent the perpetual price of a claim on an index. For instance, Interdax's BTC-PERP index is calculated using statistical methods applied to the price of BTC-USDT across major spot markets.
To keep the price of the perpetual contract in line with the index that represents the asset being traded, regular payments between buyers and sellers are used. Hence, perpetuals are also known as ‘perpetual swap contracts’ since payments are swapped between counterparties on a periodic basis.
For instance, suppose the funding rate is positive and the price of the perpetual is trading above the spot price, then those in long positions pay those in short positions. This incentivises more people to take short positions to earn additional payments from the funding rate, which in turn, brings the price of the perpetual contract back in line with the spot price.
Because the funding rate and funding payments of Interdax's perpetual contract are calculated several times per second, instead of fixed interval payout periods, these contracts are continuously settled.
Perpetuals provide two main benefits over futures with expiry for investors/traders:
- With no expiry date for perpetuals, traders are not required to roll over their futures contracts from the front month to a further out month.
- Perpetuals generally trade closer to the spot price since periodic payments close the gap between the perpetuals prices and the underlying index price.
Interdax's perpetual contract for bitcoin is settled in the underlying asset. With the BTC-PERP instrument, you can trade with up to 100x leverage. Because of the continuous settlment feature, PnL is realised at all times, meaning as soon as a position is in profit, these funds can be used to open new positions, transfer to another sub-account or withdraw straight away.
You must meet certain margin requirements to open leveraged positions: initial margin and maintenance margin. If your account balance cannot meet the initial margin requirements, your orders will be cancelled while your position will be liquidated if the maintenance margin cannot be met. The margin requirements are a fixed percentage plus a multiplier accounting for the size of the position.
Trading with a Bitcoin Perpetual Contract
Suppose you want to take a long position on a bitcoin perpetual contract, this means you will buy bitcoin contracts now and sell them at a later date. You enter the trade when bitcoin is at $9,357.5 and use a leveraged position to trade $100,000 worth (or 10.6866 BTC worth) of contracts.
Each contract is equivalent to 1 USD and is settled in bitcoin. If you wanted to open a position of 5 BTC and the price of bitcoin is $9,000, you will have to buy 45,000 contracts.
You can use the order box to buy or sell at market or using a limit order.
First, you must have enough in your BTC account to cover the initial margin to open the position. The formula page in the Help Centre displays the calculation of initial margin.
Once you have submitted your order and it is processed, your trade will appear in the positions panel at the bottom of the screen.
The positions panel displays information such as the value of the position, the mark price, liquidation price, margin, leverage and realised PnL.
The value column shows the position's value in BTC and next to it is the entry (or fill) price.
The mark price is defined as the estimate of the true value of a contract. Statistical methods are used to calculate the mark price from the spot prices for the underlying asset on the exchanges with the deepest order books and prevents any unfair liquidations due to a highly volatile market.
The liquidation price is the price at which you are no long able to meet the maintenance margin requirement - the formula for maintenance margin can be found on the Formulas page of the Help Centre. If the available balance is no longer enough to meet the maintenance margin, the position will be liquidated and taken over by the risk system.
The margin column tells us the amount of margin that has been used. If your account balance falls below this value, your position will be liquidated. You can also check the amount of margin used with the browser panel by clicking on Margin:
The leverage used is also displayed in the positions panel.
You can also specify leverage by creating and sub-account and moving funds there. For example, if you wanted to go long using 30:1 leverage, you could fund a sub-account with 0.1 bitcoin and enter a position of 30,000 contracts (assuming the bitcoin price is $10,000).
The realised PnL column shows the profit/loss of your perpetual contract position, and is determined using limit or fill prices. The entry price and position value, along with the mark price are used to calculate the realised PnL. Any realised profits can be immediately used to open new positions, transferred to a sub-account or withdrawn because of continuous settlement.
As mentioned before, there are payments between buyers and sellers to keep the price of a perpetual in line with the underlying asset. The interest payments are totalled and debited/credited for an account's position daily. You can view your funding payments (as well fees and fill prices) in the Transaction History.
To close a position, you must submit an equivalent order in the opposite direction (for example, if you are short 100,000 contracts of BTC-PERP, you must buy 100,000 contracts to fully close the position). Once your position is closed, your account's balance is updated using the PnL.