Perpetual Futures
Introduction to Perpetual Futures 📈
Perpetual futures are financial contracts that allow traders to speculate on the price of an asset without having to own it directly and without an expiration date.
Traders can speculate both on the asset's price going up (long) or going down (short) using leverage, which means they can control larger positions with less capital. Unlike traditional futures contracts that have a specific expiration or settlement date, perpetual contracts remain open indefinitely, which gives traders more flexibility in managing their positions 👁
No Expiration Date: Traders can hold positions for as long as they want, provided they maintain sufficient margin. This feature is particularly attractive for traders who do not want the hassle of rolling over their contracts 💥
Continuous Funding Mechanism: Perpetual futures use a funding rate to anchor the contract price to the underlying asset's spot price. This prevents large deviations between the futures and spot markets 🛒
Trading Flexibility: Since there is no expiration, traders do not face the risks associated with contract rollovers, allowing them to adjust or maintain positions as needed ⚡
Use Cases 📊 📊
Perpetual futures are popular among traders who wish to speculate on short-term price movements or hedge their spot holdings without worrying about contract expirations.
Example for Understanding Long and Short with Leverage 📈📉
Let's look at two friends, Alice and Bob, to understand how "long" and "short" positions work in perpetual futures, including the use of leverage.
Alice Goes Long with Leverage 🎢
Scenario: Alice believes the price of Bitcoin will go up.
Action: Alice opens a "long" position using perpetual futures with 10x leverage, meaning she only needs to put up a fraction of the position's value as margin. For example, if she wants to control a $10,000 position, she only needs $1,000 as collateral.
Outcome: If Bitcoin's price rises from $20,000 to $25,000, Alice makes a profit of $5,000. Because of the 10x leverage, her initial $1,000 investment has turned into a $5,000 profit, giving her a significant return on her margin. However, if Bitcoin's price goes down, her losses would also be amplified by 10x.
Bob Goes Short with Leverage 😱
Scenario: Bob believes the price of Bitcoin will go down.
Action: Bob opens a "short" position using perpetual futures with 5x leverage, meaning he only needs to put up 20% of the position's value. If Bob wants to control a $10,000 position, he needs to provide $2,000 as collateral.
Outcome: If Bitcoin's price drops from $20,000 to $15,000, Bob makes a profit of $5,000. With 5x leverage, this means his initial $2,000 investment results in a $5,000 profit. However, if Bitcoin's price goes up instead of down, Bob's losses would also be magnified by 5x.
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