Cryptocurrency contracts refer to a type of derivative trading contract signed between investors and exchanges, based on predictions of price fluctuations of digital assets. By paying a margin and utilizing leverage, investors can amplify their returns. These contracts are primarily divided into two types: perpetual contracts and futures contracts. Perpetual contracts have no expiration date and can be held long-term, while futures contracts have specific delivery dates and are automatically executed upon expiration. The beginner's guide includes understanding contract concepts, types, margin and leverage mechanisms, choosing a legitimate trading platform, completing account opening and deposits, and learning through practice about opening positions, closing positions, and risk management techniques to ensure relatively safe trading.
1. Definition of Cryptocurrency Contracts
Cryptocurrency contracts, as a method of financial derivatives trading in the digital currency field, are unique in that they do not involve the actual purchase or holding of digital assets. The core of this trading method lies in predicting price fluctuations of assets. Investors can participate in this price prediction-based derivative trading by signing contracts with exchanges and paying a certain percentage of margin. Compared with spot trading, cryptocurrency contract trading focuses more on price prediction and speculative hedging strategies.
In cryptocurrency contract trading, margin plays a crucial role. It is the capital that investors need to pay to the exchange before trading, used to guarantee the smooth execution of transactions. The margin ratio is not fixed but is determined by various factors such as trading varieties, contract types, and leverage ratios. This mechanism ensures that both parties can comply with contract terms while providing certain risk protection for the exchange.
Leverage is another important concept in cryptocurrency contract trading. It determines how many times the margin an investor can use for trading. The existence of leverage allows investors to participate in larger trades with a smaller amount of capital, thereby amplifying potential returns. However, high leverage also means high risk, as investors enjoy potential profits while also needing to bear greater loss risks.
Before participating in cryptocurrency contract trading, investors also need to understand the concepts of long and short positions. Long positions refer to investors who predict price increases and buy contracts, expecting to profit when prices rise; while short positions refer to investors who predict price declines and sell contracts, hoping to profit when prices fall. The existence of long and short positions makes the market more diversified and provides investors with more trading opportunities.
To ensure safe and stable trading, choosing a legitimate, secure, and reliable exchange is crucial. When evaluating an exchange, investors should pay attention to its qualifications, history, user reputation, and other factors to ensure a safe and stable trading environment. On this basis, investors also need to complete account opening and deposit operations, following the platform's guidance for identity verification and capital deposit, to prepare adequately for trading.
2. Types of Cryptocurrency Contracts
Cryptocurrency contracts are mainly divided into two categories: perpetual contracts and futures contracts, each with unique features and trading mechanisms. A perpetual contract is a type of contract without an expiration date, meaning traders can hold positions long-term without worrying about the risks associated with contract expiration. The trading price of perpetual contracts is usually based on the index price of the spot market and is maintained through a funding rate mechanism to ensure price rationality. The funding rate is a fee charged periodically to balance the long and short forces in the market, thereby maintaining price stability. Additionally, perpetual contracts support high leverage trading, allowing investors to operate large assets with small amounts of capital, thus amplifying potential returns. However, high leverage also means increased risks, requiring investors to operate cautiously.
In contrast to perpetual contracts, futures contracts have specific expiration dates, such as this week, next week, this quarter, next quarter, etc. Upon expiration, the system will automatically execute the delivery, regardless of profit or loss. The trading price of futures contracts is closely related to the spot price but is influenced by various factors such as market sentiment and capital flow, leading to potential price fluctuations. Because futures contracts have clear expiration dates, traders need to make decisions before expiration, whether to close positions or deliver. This adds complexity and risk to trading, requiring traders to possess higher market judgment capabilities and risk management awareness.
1. Types of Margin
USDT Margin Contracts: Using stablecoin USDT as collateral, allowing for multi-currency trading, with profit and loss settled in USDT. The advantage of this type of margin is the stability of USDT, which effectively reduces the settlement risks caused by price fluctuations. Furthermore, using USDT as collateral allows investors to focus more on market trend judgment without worrying about the impact of the underlying currency's price fluctuations on their positions. Additionally, as a globally accepted stablecoin, USDT has high liquidity, facilitating quick capital adjustments by investors.
Margin Contracts Based on Currency: Using the underlying currency as collateral, investors must hold the corresponding currency before trading, with profit and loss settled in that currency. Currency-based margin contracts allow investors to directly participate in trading the underlying currency without needing to convert currencies, thus reducing trading costs. Additionally, this type of contract enhances investors' confidence in holding the underlying currency, as the profit and loss of the position directly reflect the price changes of the underlying currency. Furthermore, currency-based margin contracts help investors better manage their asset portfolios and achieve diversified investments.
2. Funding Rate Mechanism
The funding rate mechanism in perpetual contracts is key to maintaining price rationality. This mechanism balances the long and short forces in the market by periodically charging or paying the funding rate, preventing prices from deviating from reasonable ranges. When the market shows a one-sided trend, the funding rate will adjust accordingly to encourage reverse traders to enter the market, thereby increasing market liquidity and stability. Furthermore, the funding rate mechanism helps prevent malicious market manipulation because any investor attempting to profit from one-sided trends must bear higher capital costs. Additionally, the funding rate mechanism provides exchanges with an effective risk management tool to ensure the healthy operation of the market.
Cryptocurrency contract trading offers advantages such as high leverage and flexible trading but also comes with higher risks. Investors should fully understand market dynamics, risk factors, and trading rules before participating in trading, and develop reasonable risk management strategies. Remember, investment requires caution; do not blindly follow trends or overtrade. While pursuing returns, ensuring capital safety is the long-term strategy.
