Today we talk about Perpetuals, derivative financial instruments that have substantial differences between them. Both allow you to speculate without physically owning the underlying (which can be BTC or another cryptocurrency for example), this is because the price is bought and sold. It is worth remembering that even when you trade with the spot cryptocurrency market where you buy and sell, you are essentially trading via spot. If I buy I'm "long" (I expect the price to rise), if I sell I'm "shorting" (i.e. I expect the price to fall so I sell the underlying spot).
are traded on regulated markets and have a specific expiry date, which is the day on which the agreement must be executed. The expiration date in futures contracts has a specific role in forcing traders to physically or financially liquidate the contract upon expiration. Futures speculators must pay margins to participate, which are collateral deposits to cover any losses. If you wish to hold a futures position beyond its expiration date, you may need to roll over, with associated costs. Let's say you want to trade BTC futures. You could purchase a futures contract that expires in three months at a fixed price of $60,000 per BTC. This means that you are obligated to purchase Bitcoin at $60,000 on the contract expiration date, regardless of the market price on that day. If the price of Bitcoin rises, you make money; if it decreases, you suffer losses. As mentioned, it is possible to keep the position open beyond the expiration, incurring costs. In futures markets, it is common to use leverage. When you open a futures position, you are required to pay a margin, which represents only a fraction of the total value of the contract. Through leverage it is possible to control a position with a value greater than the deposited margin. For example, if the required margin is 20%, you can control a contract worth 5 times the deposited margin. A futures contract can be liquidated before its expiry, for example if the price of the underlying asset moves in the desired direction it is possible to close the position early to make a profit. Conversely, if the price goes against the position, you can close the position to limit losses. For example, if you opened a long (bullish) position on a futures contract, you can close that position by selling the same number of futures contracts. Conversely, if you have opened a short (bearish) position, you can close that position by purchasing the same number of futures contracts.
If the value of the position approaches the required margin, the platform may request additional funds (Margin Call) or proceed with liquidation (to prevent the investor from accumulating losses greater than the capital invested).
Initial Situation
Today's Bitcoin Price: $60,000
Futures Contract: Purchase a Bitcoin futures contract with an opening price of $65,000 and a leverage of 10%.
Expiry Date: In 3 months.
Early Closing at a Loss
After 1 month, the price of Bitcoin dropped to $55,000.
Position Value Calculation:
Number of contracts = $6,500 (margin) / $65,000 (opening price) = 0.1 BTC
Current position value = 0.1 BTC * $55,000 = $5,500
Loss = Current Position Value - Initial Margin
Loss = $5,500 - $6,500 = -$1,000
In this case, by closing the position early, the trader suffers a loss of $1,000
Early Closing for Profit
After 2 months, the price of Bitcoin rose to $70,000.
Position Value Calculation:
Number of contracts = $6,500 (margin) / $65,000 (opening price) = 0.1 BTC
Current position value = 0.1 BTC * $70,000 = $7,000
Profit = Current Position Value - Initial Margin
Profit = $7,000 - $6,500 = $500
In this case, by closing the position early, the trader makes a profit of $500
Holding Open Until Expiration
On Expiration Date: The price of Bitcoin is $67,000.
Position Value Calculation:
Number of contracts = $6,500 (margin) / $65,000 (opening price) = 0.1 BTC
Current position value = 0.1 BTC * $67,000 = $6,700
Profit or Loss = Current Value of Position - Initial Margin
Profit or Loss = $6,700 - $6,500 = $200
In this case, by holding the position open until expiration, the trader makes a profit of $200
Futures can also be used as instruments. Let's say the price of one BTC is $40,000, but you are concerned that the price may decrease in the coming months and you want to protect your investment. You can open a Short (Bear) position on futures contracts. In short, open a short position to sell futures contracts equivalent to the amount of Bitcoin you want to protect. If the price of BTC decreases, your short futures position will gain value, offsetting the losses due to the decrease in BTC price. If the price of BTC rises, the losses on your short futures position will be offset by the increase in value of your spot portfolio.
PERPETUALS
Perpetuals, unlike Futures, are contracts without an expiration date. They can be kept open indefinitely. They can also be traded on OTC markets. In perpetuals, users can receive or pay daily funding depending on the direction of their position. Since there is no expiration date, perpetuals do not require the payment of margins related to the expiration of the contract. In short, the main difference is the presence or absence of an expiration date. Perpetuals offer greater flexibility as they allow you to keep positions open indefinitely but still present risks of liquidation using leverage. Let's say you want to trade perpetuals on BTC. You could open a long (bullish) position without a specific expiration date. You can keep this position open as long as you wish. If, however, you believe that the price may fall, you can open a "short" position. The funding rate is an interest rate that is periodically exchanged between long (bullish) and short (bearish) traders to ensure that the price of the contract is aligned with the market price of the underlying asset. This rate can be positive or negative, depending on market dynamics.
Negative Funding Rate: if the contract price is lower than the spot price of the asset, short operators pay long operators the funding rate. This encourages long positions when the market is bearish.
Positive Funding Rate: if the price of the contract is higher than the spot price of the asset, long operators pay short operators the funding rate. This is to discourage long positions when the market is bullish.
The payment or receipt of the funding installment occurs at regular intervals (usually every 8 hours), but the specifics may vary depending on the trading platform. This process helps keep the contract price aligned with the market price of the underlying asset, making perpetuals suitable for long-term trading without having to manage contract expiration.
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