In cryptocurrencies, a perpetual contract (or 'perps') is a financial derivative that allows traders to speculate on the price of an asset, such as a cryptocurrency, without the need to buy or own the underlying asset and, importantly, without an expiration date. It is like a futures contract, but without an expiration date.
What does this mean in practice?
No expiration date:
Unlike traditional futures contracts, perpetual contracts do not have a settlement date. This means that traders can keep their positions open indefinitely, as long as they meet margin requirements.
Speculation:
Perpetual contracts allow traders to speculate on the price movements of a cryptocurrency, taking both long positions (expecting the price to rise) and short positions (expecting the price to fall).
Leverage:
Many perpetual contracts offer leverage, allowing traders to control a larger position with a smaller initial investment. This can amplify both profits and losses.
Funding rate:
To ensure that the price of the perpetual contract stays close to the spot price of the underlying asset, a funding rate is used. This rate is paid periodically between traders with long and short positions.
In summary, perpetual contracts are popular trading tools in the cryptocurrency market that offer flexibility and speculation opportunities, but also come with additional risks due to leverage and the volatile nature of cryptocurrencies.