With the continuous advancement of the digital currency market, more and more investors are beginning to invest in this field. One of the hottest trading methods among them is contract trading. Contract trading is widely used in futures, leveraged trading, and other aspects in the cryptocurrency space. So, what are cryptocurrency contracts? What are the terminologies related to cryptocurrency contracts? Let's take a look.
What does cryptocurrency contract mean?
A contract is essentially a contract signed with an exchange, paying a certain margin. There are two types of contracts: delivery contracts and perpetual contracts. Delivery contracts have a delivery period, similar to futures, and will automatically liquidate at the delivery time. Perpetual contracts have no time limit, and contracts involve buying long or short; profits are made when the market rises by going long, and profits are made when the market falls by going short. Subsequently, leverage can be used to conduct trading, where the leverage multiple can be freely chosen, and different leverage multiples entail different risks. Contracts are optimized under the premise of leveraged trading to allow users to operate trades more effectively. Compared to spot trading, contracts provide an additional option to short (which means to profit from a decline), making them relatively more flexible than spot trading.
As virtual currencies develop, virtual currency contract trading has gradually become a popular trading method. It is a way of trading through contracts rather than actual purchase or holding of assets. These contracts are often derivatives that allow traders to speculate or hedge based on the price fluctuations of virtual currencies. Contract trading involves leverage, going long or short, etc., and different types of contracts have different play styles, making it difficult for investors to understand how to trade virtual currency contracts. However, as long as they understand the concept of contract trading and gradually explore within the exchange, they can comprehend it.
What are the basic terminologies in cryptocurrency contract?
1. Contract Price
The contract price refers to the price of the digital currency at the expiration of the contract. Generally, the contract price is determined by the supply and demand in the market, that is, the price generated by market investors during the trading phase.
2. Contract Quantity
Contract quantity refers to the total number of trades at the expiration of the contract. Generally, the contract quantity is determined by investors during the trading phase.
3. Leverage
Leverage refers to the loans used by investors during trading. Generally, investors can increase a certain leverage on their own capital to amplify their profits.
4. Contract Margin
Contract margin refers to the margin that investors must pay during the trading process. Generally, the contract margin is calculated based on the contract quantity and trading price.
5. Contract Expiration Date
The contract expiration date refers to the last trading date of the contract. Generally, before the contract expiration date, investors must decide whether to continue holding the contract or sell it.
6. Risks of Contract Trading
Although cryptocurrency contract trading can bring huge profits to investors, there are also certain risks. When engaging in contract trading, investors must carefully consider their risk tolerance to avoid significant losses caused by blindly following market trends.
Advanced Contract Terminology
1. Margin Rate
The margin rate is an indicator reflecting the safety level of a position; a higher margin rate means a safer position.
So, how is the margin rate calculated? The unified account of OKEx provides various margin mode types, categorized into single currency margin mode - full margin, cross currency margin mode - full margin, single/cross currency margin mode - isolated to showcase their calculation methods.
1) Single Currency Margin Mode, Full Margin Trading
Margin Rate = (Balance in this Currency in Full Margin + Full Margin Profit - Quantity Sold in this Currency - Quantity of this Currency Needed for Options Purchase - Quantity of this Currency Needed for Isolated Margin - All Order Fees) / (Maintenance Margin + Liquidation Fee).
Maintenance margin is the sum of the leverage borrowing maintenance margin, delivery maintenance margin, perpetual maintenance margin, and options maintenance margin, including pending orders; liquidation fees consider the leverage borrowing fees, delivery fees, perpetual fees, and options fees, including pending orders. This setup is intended to avoid sudden changes in the risk level of accounts after pending orders are executed, thereby triggering liquidation risks.
Liquidation Fee = Leverage Borrowing Fee + Delivery and Perpetual Fee + Options Fee
Among them, the leverage borrowing fee = Value of Borrowed Position * User Taker Rate; Delivery and Perpetual Fee = Value of Delivery and Perpetual Position * User Taker Rate; Options Fee = Value of Options Position * User Taker Rate.
2) Cross-currency margin mode, full margin trading
Margin Rate = Effective Margin / (Maintenance Margin + Reduction Fee)
Maintenance margin is calculated based on (position quantity + opening order quantity).
The reduction fee is calculated based on (position quantity + opening order quantity).
3) Single/Cross Currency Margin Mode, Isolated Trading
Long Position: Margin Rate = [Position Asset - (Liabilities + Interest)] / (Maintenance Margin + Fee)
Empty Position: Margin Rate = [Position Asset - |Liabilities + Interest| * Mark Price] / (Maintenance Margin + Fee)
2. Liquidation Profit
Long Position Liquidation Profit = (Face Value * Contract Multiplier * Number of Contracts) / Opening Average Price - (Face Value * Contract Multiplier * Number of Contracts) / Closing Average Price
Short Position Liquidation Profit = (Face Value * Contract Multiplier * Number of Contracts) / Closing Average Price - (Face Value * Contract Multiplier * Number of Contracts) / Opening Average Price
3. Reducing Positions and Forced Liquidation
Under the full margin system, when the user's held position changes in the opposite direction of the latest transaction price, if the margin rate is less than or equal to the maintenance margin rate + liquidation fee rate, it will trigger position reduction or liquidation.
Under the isolated margin system, when the user's position changes in the opposite direction of the latest transaction price, if the margin rate of the user's position is less than or equal to the maintenance margin rate + liquidation fee rate, it will trigger position reduction or liquidation.
When the user's position level is at level 3 or above, if the margin rate of the position is lower than the required maintenance margin rate for the current level + liquidation fee rate, but still higher than the minimum level's maintenance margin rate + liquidation fee rate, the user's entire position will not be forcibly liquidated at once. The system will calculate the number of contracts needed to reduce the position by two levels and perform partial liquidation. After successfully lowering the level, if the margin rate meets the maintenance margin rate requirement for the new level, the partial liquidation will stop; if it still does not meet the new level's maintenance margin rate requirement, the partial liquidation process will continue.
When the user's held position is at level 2 or below, and the margin rate is less than the required maintenance margin rate for this level + liquidation fee rate; or when the user's held position is at level 3 or above, but the margin rate is lower than the required maintenance margin rate for level 1 + liquidation fee rate, the system will directly delegate all contracts (in full margin condition) / all contracts of the position (in isolated condition) to the liquidation engine at the bankruptcy price (the price at which the margin rate is zero).
This early liquidation mechanism is mainly to prevent the adverse effects caused by drastic fluctuations in digital currency leading to a series of liquidations and position penetration (positions that cannot be executed after liquidation).
After triggering forced liquidation, the liquidation engine will forcefully take over the liquidated position. At this point, the user's liquidation loss is equivalent to the loss caused by the margin rate of that position dropping to 0, with the maximum loss not exceeding the total margin of the liquidated position.
4. Automatic Position Reduction
Auto-Deleveraging (ADL) refers to a mechanism that triggers forced liquidation of positions when extreme market conditions or force majeure factors lead to insufficient or rapidly declining risk reserves, in order to control overall platform risk. Currently, rapid decline is defined as a direct decrease of 30% from the peak of risk reserves within 8 hours; the platform may adjust based on market conditions thereafter.
After ADL is triggered, the platform will no longer handle users' forced liquidation and reduced positions by placing orders in the market and waiting for suitable prices to be matched. Instead, it will directly find the accounts ranked higher on the opposite side and execute transactions at the current mark price. After the transaction, the relevant contract positions of the opposite account will be reduced, and the profits from the positions will be converted into account balance. After handling the loss of positions through the automatic reduction mechanism, the platform will no longer distribute the loss.
When the user is automatically reduced in position, they will receive SMS and email notifications informing them of the reduced position and the reduced price. They can also check the reduction bill on the order center page, with the bill type being auto-reduction.
5. Risk Reserves
Risk reserves are the reserves used by the OKEx platform to guard against the risk of liquidation orders penetrating positions, mainly sourced from the reserves provided by the OKEx platform and the remaining from liquidation orders.
The various business lines of OKEx—leveraged trading, delivery, perpetual, options—have independent risk reserves, and within each business line, the risk reserves of different underlying contracts and currencies are also independent.
Every day at 16:00:00 (HKT), the platform will transfer the losses or gains caused by all forced reductions and liquidations from the previous day at 16:00:00 (HKT) to the risk reserve account, recorded as penetration losses and forced liquidation injection.
6. Opening and Closing Position Mode and Buy/Sell Mode
The main difference between the two is that the opening and closing position mode can open positions in two directions, while the buy/sell mode can only open positions in one direction.
In the buy/sell mode, users can simply place orders by buying/selling. In this mode, only one-sided positions are held. This means that in this mode, a contract trading pair can only hold a position in one direction; thus, positions in different directions will offset each other, achieving the effect of merging positions in different directions.
In the opening and closing position mode, users can place orders through four types of operations: opening a position (long/short) and closing a position (liquidating long/liquidating short). This mode supports dual-direction positions. This means that under this mode, the same contract trading pair can hold both long and short positions simultaneously, and the margin used for both directions, leverage multiples, and position sizes do not affect each other, thus hedging risks.
Note: The order mode applies to all contracts under delivery/perpetual contracts. If there are existing positions or open orders, adjustments to the order mode are not allowed.
7. Other Common Terms
What are the meanings of other common terms in contracts?
Coin-margined contracts: Also known as inverted contracts, denominated in USD, acting as the collateral asset and the currency for profit and loss calculations is the underlying currency (e.g., BTC, ETH, etc.). For example: If I want to trade BTC coin-margined contracts, I need to hold BTC to place an order, and the profit and loss settlement is also in BTC.
USDT-margined contracts: Also known as direct contracts, denominated in U, including USDT, USDC, etc., acting as the collateral asset and the currency for profit and loss calculations is U. As long as you hold U, you can trade contracts in multiple currencies, and profit and loss settlements are also in U.
Full Margin: In full margin mode, all available balance in your account will be used as your position margin. The advantage is that it can increase the capacity to bear liquidation; the disadvantage is that once liquidated, all assets in the account will be lost.
Isolated Margin: In isolated margin mode, the margin locked at order placement is the maximum loss for that position. The advantage is that once liquidated, the loss is limited to the margin at the time of opening the position; the disadvantage is that the capacity to bear liquidation is not as great as in full margin mode.
Leverage Multiple: The greater the leverage multiple, the higher the potential return, while the risk is also greater. Therefore, traders should pay attention to market fluctuations and manage profits and losses in a timely manner.
Average Opening Price: The average opening price of the current position.
Mark Price: The latest mark price of the contract, which is used for calculating profit and loss and margin. The introduction of mark price can effectively avoid abnormal trading.
Forced Liquidation Price and Margin Rate:
Under a unified account, if a user opens multiple contract positions, the estimated forced liquidation price may differ from the actual forced liquidation price. In this case, the estimated forced liquidation price can be used as a reference, but it is recommended to rely on the margin rate. When the margin rate of the contract position ≤ 100%, it will trigger position reduction or liquidation.
Note: This article may contain product-related content that is not applicable in your region. This article is intended to provide general information only and does not take responsibility for any factual errors or omissions contained herein. This article is not intended to provide any advice. Holding digital assets involves high risks, and you should carefully consider whether trading or holding digital assets is suitable for you based on your financial situation.
What points should be noted in cryptocurrency contract trading?
When conducting cryptocurrency contract trading, traders should pay attention to the following points:
1. Risk Management:
Although leveraged trading can bring higher profits to traders, it also faces higher risks. Therefore, traders must reasonably control their positions to prevent substantial losses.
2. Choose a Reliable Exchange:
When engaging in cryptocurrency contract trading, it is important to choose a reliable exchange. The exchange should not only be secure but also have an efficient trading and matching system, as well as good customer service and tool applicability.
3. Master Trading Strategies:
Leveraged trading requires traders to have high trading skills and market analysis abilities. Understanding market trends and formulating trading strategies is crucial. Therefore, traders must thoroughly understand market trends and carefully analyze trading strategies before engaging in cryptocurrency contract trading, and reasonably manipulate their positions based on their own circumstances. In summary, leveraged trading in cryptocurrency contract trading necessitates that traders possess high trading skills and market analysis capabilities while paying attention to risk management and identifying reliable exchanges to better seize trading opportunities amidst the ever-changing market.
Overall, contract trading in the cryptocurrency space is a very promising trading method that plays an important role in the digital currency market. However, for ordinary investors, it is essential to study and understand carefully in order to engage in reasonable trading. Only with proper risk management can one truly benefit from contract trading in the cryptocurrency space.
