Futures Contracts and Perpetual Futures Contracts (Perps) are financial instruments that allow you to profit from crypto price movements without owning the underlying assets. Knowing about these crypto derivatives will be valuable to your Crypto know-how. Not only will it help you diversify your portfolio, but it will also enable you to capitalize on market volatility without worrying about owning the underlying asset.
What is a Crypto Future Contract?
Crypto futures contracts or Crypto futures are a kind of Crypto derivative asset. The contract lets you speculate on the direction of the crypto price action. This is done by giving the owner of the Crypto Future Contract the Right and the Obligation to:
- BUY or SELL a certain Crypto
- On a Certain Date(known as the Future Contract Expiry Date/ Settlement Date)
- At a Price that is different from the spot price of the Crypto on the Contract Expiry Date.
- This transaction occurs on a certain date (known as the expiry or settlement date).
- The transaction’s price is predetermined when the contract is created and can differ from the cryptocurrency’s spot price (current market price) on the expiry date.
This unique structure of the Crypto Futures Contract opens up several strategic advantages for traders.
- By speculating on future price movements, traders can profit from both rising and falling markets, flexibility not offered by simply holding the underlying asset.
- Furthermore, futures contracts allow for leveraged trading, where traders can control a larger position with a smaller initial investment, amplifying potential gains (and losses).
- Lastly, the ability to lock in a future price can be used to hedge existing holdings, protecting against adverse price movements and reducing overall portfolio risk.
What is a Crypto Perpetual Future Contract?
A future perpetual contract, known as perps, is a similar crypto derivative asset slightly different from a normal futures contract. Unlike a regular futures contract with an expiration date on which the contract MUST be settled, Perps does not have an expiration date, opening up many strategic possibilities.
EXAMPLE of Crypto Perps
Imagine you want to trade Bitcoin using a perpetual futures contract on an exchange. Today is 1st July 2024, and the current price of 1 Bitcoin (BTC) is ₹30,00,000. You enter a long (buy) position on the perpetual contract.
- Mark Price (1st July 2024): ₹30,00,000 (current price of Bitcoin)
- Funding Rate: 0.01% per 8 hours (this rate varies and affects traders holding positions)
- Leverage: 10x (you are trading with 10 times the amount of Bitcoin you hold)
Opening the Position (1st July 2024): You buy 1 BTC using the perpetual futures contract.
- Contract Value = 1 BTC × ₹30,00,000 = ₹30,00,000
- Leverage Effect: With 10x leverage, you only need ₹3,00,000 (10% of the contract value) in your account as margin.
- Margin = ₹30,00,000 / 10 = ₹3,00,000
- Monitoring the Trade: Suppose you hold the position for a week. On 8th July 2024, the mark price changed to ₹31,00,000 per BTC.
Profit Calculation: You decide to close your position on 8th July 2024.
- Profit = (₹31,00,000 – ₹30,00,000) × 1 BTC = ₹1,00,000
As the example explains, a Perpetual futures contract allows you to profit from Bitcoin’s price movements with leverage over a specified period (from 1st July 2024 to 8th July 2024), making it accessible to traders who can trade with a fraction of the asset’s actual value.
Key Differences Between Futures Contracts and Perpetual Futures Contracts
The main point of difference between Perpetual Futures and Future contracts is that Perpetual don’t have an expiration date, meaning that they can be held indefinitely.
Here’s a table showing the detailed comparison:
| Feature | Perpetual Contracts (Perpetual Swaps) | Futures Contracts |
| Expiration Date | No expiration date | Fixed expiration date |
| Settlement | Cash-settled (no delivery of the underlying asset) | Can be cash-settled or physically delivered |
| Funding Rate | Yes (to keep the price close to the spot) | No |
| Price Alignment | Closely tracks the underlying asset’s spot price | May deviate from the spot price, especially near expiration |
| Leverage | Typically high | High, but may vary depending on the contract |
| Trading Volume | Usually higher due to continuous trading | It can be high but may vary near expiration |
| Suitability | Traders seeking long-term positions or mimicking spot trading | Traders seeking to hedge or speculate on price movements within a specific timeframe |
Market Impact of Futures and Perpetual
Perpetuals and Future Contracts significantly impact the crypto market in several ways:
Increased Liquidity and Trading Volume
Perpetual futures open the world of continuous trading without expiration dates.
HOW?: Perps don’t need to be closed on a specific expiration date. This means that traders don’t buy and sell under the pressure of expiration of the contract( which would have led to the temporary distortion of the markets)
In addition, Perps like Traditional Future Contracts allow you to LEVERAGE your positions— meaning you can control a larger amount of crypto than you can do through a spot trade. This incentivizes more active trading.
Perpetual contracts, with continuous trading and no expiration dates, have attracted many traders, boosting overall market liquidity and trading volume. This makes it easier for investors to enter and exit positions, reducing slippage and improving price discovery.
Price Discovery and Efficiency
Price discovery is the process by which the market determines the fair price of a cryptocurrency.
Both Crypto perpetual and Crypto futures contribute to price discovery.
HOW: Crypto Perpetuals don’t have an expiration date, meaning they can be traded continuously. This continuous trade allows traders to have a constant stream of price information available, allowing them to react and adjust their positions to news, events, and market sentiment around the clock. This information enables trades to establish a more accurate market price more efficiently.
Hedging and Risk Management
Many people are still waiting to add crypto to their portfolios because of the high volatility offered by crypto markets. Futures contracts, in particular, provide valuable hedging tools in Crypto trading. With futures, you can lock in prices, reducing the impact of adverse price movements on your holdings or operations.
Market Manipulation Concerns
These contracts’ high leverage and speculative nature have raised concerns about potential market manipulation. Large traders, often called “whales,” can influence prices with significant positions, especially in less liquid markets.
Conclusion
Perpetual and futures contracts have undeniably transformed the crypto market by making it more efficient, liquid, and accessible. However, they also come with risks, including increased volatility and potential for manipulation. As the crypto market continues to mature, regulators, exchanges, and traders must work together to mitigate these risks and ensure the sustainable growth of the ecosystem. This is where Mudrex can help you— Mudrex offers an easy-to-use app where you can start and navigate your crypto trading journey confidently.
FAQs
What is an example of a perpetual futures contract?
A perpetual futures contract is a type of derivative product that lets you bet on the future price of a cryptocurrency without an expiration date. For example, if you think the price of Bitcoin (BTC) will increase, you can buy a BTC perpetual contract. If the price increases, you profit; if it goes down, you lose.
How do crypto futures contracts work?
Crypto futures contracts are agreements to buy or sell a cryptocurrency at a predetermined price on a specific future date (expiry). These contracts let you speculate on price movements without owning the actual crypto. You can go long (betting on price increase) or short (betting on price decrease).
What is the difference between spot and perpetual futures?
Spot trading is buying or selling cryptocurrencies at the current market price for immediate delivery. Perpetual futures, on the other hand, are contracts that don’t expire. They closely mimic spot market prices and are often used for leveraged trading. Learn more about the differences in our post on [link to your blog post about spot vs. futures trading].
What are the disadvantages of crypto futures trading?
Crypto futures trading involves higher risk than spot trading due to leverage. This can lead to significant losses if the market moves against your position. Additionally, futures markets can be complex and require a good understanding of risk management strategies.
How are futures contracts settled daily?
Crypto futures contracts use “funding rates” to keep the contract price aligned with the spot market price. These rates are periodically paid between traders holding long and short positions, ensuring the contract price doesn’t stray too far from the actual market price.
What are the 4 types of futures contracts?
In the crypto world, the main types of futures contracts are:
- Perpetual Contracts (Perpetual Swaps): No expiration date, traded continuously.
- Standard Futures: Expire on a set date and can be cash-settled or physically delivered.
- Quarterly Futures: Expire at the end of each quarter.
- Inverse Futures: Denominated in the underlying cryptocurrency (e.g., Bitcoin), not USD.
Krishnan is a Bangalore-based crypto writer dedicated to simplifying complex crypto concepts. He covers blockchain, DeFi, and NFTs, with a focus on real-world asset tokenization and digital trust. Previously he has written on Real Estate related assets for NoBroker. Krishnan holds a B.Tech degree from the College of Engineering Trivandrum.
