1. Definition and Classification of Contract Trading

Contract trading is a type of financial derivative that allows investors to profit by predicting price movements without actually holding the underlying asset. Its core mechanism involves both parties agreeing to trade the underlying asset (such as Bitcoin, Ethereum, etc.) at a specific price at a future time. Cryptocurrency contracts are mainly divided into perpetual contracts and delivery contracts, with the core difference being whether there is an expiration date:

1. Perpetual Contracts

  • No Expiration Date: Can be held indefinitely, with the funding rate mechanism anchoring contract prices to spot prices to avoid long-term deviations. For example, if the spot price of Bitcoin is 50,000 USDT, and the perpetual contract price rises to 51,000 USDT due to market sentiment, the funding rate will require longs to pay shorts, prompting the price to revert to the spot anchor.

  • Funding Rate: Settled every 8 hours, with the rate being positive or negative determined by the market long-short ratio. For example, when the market sentiment is bullish (with longs making up 60%), longs need to pay shorts a rate, typically ranging from 0.01%-0.05%.

  • Applicable Scenarios: Suitable for long-term holdings or high-frequency traders, without worrying about forced delivery risk.

2. Delivery Contracts

  • Fixed Expiration Date: Must settle at the agreed date (such as the end of the quarter) based on the spot price or through physical delivery. For example, a quarterly delivery contract settles at the expiration date based on the Bitcoin spot index price, and if the position remains open, it will automatically be delivered.

  • High Price Volatility: Easily influenced by market sentiment before delivery, may exhibit 'spike' phenomena (short-term severe price fluctuations). For example, before the delivery of Bitcoin quarterly contracts in March 2024, the price fluctuated over 10% within an hour.

  • Applicable Scenarios: Suitable for miners hedging or short-term speculators.

Comparison Summary: Perpetual contracts are flexible but require ongoing payment of funding rates; delivery contracts are suitable for specific time windows but need to guard against delivery risks.

2. Core Concepts and Operations of Contract Trading

1. The Concept of 'Contract' and Position Calculation

"Contract" is the minimum trading unit, representing a fixed value of the underlying asset. For example:

  • BTC/USDT Perpetual Contract: 1 contract = 0.001 BTC value. If the BTC price is 50,000 USDT, then 100 contracts are worth = 100 × 0.001 × 50,000 = 5,000 USDT.

  • Leverage Impact: Using 10x leverage, opening 100 contracts only requires a margin of 500 USDT (5,000 ÷ 10). If the leverage increases to 100x, the margin drops to 50 USDT, but the liquidation price comes closer to the opening price.

2. Practical Examples of Opening and Closing Positions

Opening Operation:

  • Buying to Open Long: Expecting price increase. For example, if BTC is currently priced at 50,000 USDT, the user buys 10 long contracts with 50x leverage, occupying a margin = 10 × 0.001 × 50,000 ÷ 50 = 10 USDT.

  • Selling to Open Short: Expecting price decrease. For example, if ETH is currently priced at 2,500 USDT, the user sells 5 short contracts with 20x leverage, occupying a margin = 5 × 0.01 × 2,500 ÷ 20 = 6.25 USDT.

Closing Operation:

  • Market Order: Quickly execute at the current best price, suitable for times of extreme market fluctuations. For example, if the BTC price suddenly drops to 48,000 USDT, the user chooses to close a long position at market price to avoid further losses.

  • Limit Order: Set a target price to close. For example, if the ETH long position was opened at 2,500 USDT, a limit order at 2,600 USDT is set to close, waiting for the price to reach that level for automatic execution.

3. Triggers and Responses of Forced Liquidation

Liquidation Mechanism: When the margin ratio falls below the maintenance level, the system automatically closes the position. For example, if the BTC long position was opened at 50,000 USDT, with a maintenance margin ratio of 0.5%, the liquidation price is calculated as:

  • Liquidation Price = Opening Price × Leverage / (1 + (Leverage × Maintenance Margin Rate)) = 50,000 × 50 / (1 + (50 × 0.5%)) = 48,543 USDT.

  • If the mark price drops to 48,543 USDT, the position will be forcibly liquidated.

Response Strategies:

  • Use isolated margin mode to mitigate risks and avoid total account liquidation.

  • Set stop-loss orders in advance, for example, triggering a stop-loss at 48,500 USDT.

3. Fee and Funding Rate Calculation

1. Fee Calculation Model

Fees include transaction fees and funding costs (only for perpetual contracts):

Transaction Fees:

  • Maker (Limit Order): 0.02%-0.05%, encourages liquidity provision.

  • Taker (Market Order): 0.04%-0.07%, higher rates due to consuming liquidity.

For example, opening 100 BTC contracts (worth 5,000 USDT), with Taker rate of 0.05%, the fee = 5,000 × 0.05% = 2.5 USDT.

Funding Cost: Settled every 8 hours, cost = position value × funding rate. For example, holding a long position valued at 10,000 USDT, with a funding rate of -0.03%, incurs a fee of 3 USDT per cycle.

2. Funding Rate Arbitrage Strategies

  • Positive Rate Arbitrage: Hold spot and short perpetual contracts to earn the rate difference. For example, with a funding rate of 0.1%, approximately 3% risk-free return can be achieved monthly.

  • Negative Rate Arbitrage: Hold perpetual long contracts and short spot, suitable for market bearish sentiment.

4. Strategies and Practical Applications of Take-Profit and Stop-Loss

1. Core Logic of Take-Profit and Stop-Loss

  • Take-Profit: Lock in profits and prevent market reversals. For example, if the BTC long position was opened at 50,000 USDT, set a take-profit at 52,000 USDT (4% increase).

  • Stop-Loss: Control losses and avoid liquidation. For example, if the ETH short position was opened at 2,500 USDT, set a stop-loss at 2,550 USDT (2% decrease).

2. Setting Methods and Case Studies

Fixed Point Method:

  • Example: DOGE current price 0.1 USDT, after opening a long position set a take-profit at 0.12 USDT (20% profit) and a stop-loss at 0.095 USDT (5% loss).

Dynamic Tracking Method:

  • Example: If the BTC long position rises from 50,000 USDT to 55,000 USDT, move the stop-loss price from 48,500 USDT up to 53,000 USDT to protect floating profits.

Technical Indicator Method:

  • Example: Setting a stop-loss based on support levels. If the BTC price drops below the 4-hour MA30 moving average (currently at 49,500 USDT), a stop-loss is triggered.

3. Exchange Operating Guide (using Binance as an example)

  • Step 1: On the position page, select 'Take-Profit and Stop-Loss', input the trigger price and order price.

  • Step 2: Choose the trigger type (mark price or latest price). For example, mark price is less susceptible to manipulation, suitable for long-term holdings.

  • Case Study: ETH long position opened at 2,500 USDT, set take-profit trigger price at 2,600 USDT (order price at 2,590 USDT), stop-loss trigger price at 2,450 USDT (order price at 2,455 USDT).

5. Contract Guarantee Fund and Risk Control

1. Role of the Contract Guarantee Fund

  • Source of Funds: Extracted from each transaction fee at 0.005%-0.01%. For example, if a certain exchange has a daily trading volume of 1 billion USD, it extracts approximately 50,000-100,000 USD for the guarantee fund daily.

  • Use Case: Used to cover losses from liquidation. For example, if User A suffers a loss exceeding their margin after liquidation, the fund compensates the counterparty first.

2. Risk Control Recommendations

  • Leverage Selection: Newcomers are advised to use 3-5x leverage to avoid sensitivity to liquidation prices at high leverage (such as 100x).

  • Position Management: A single position should not exceed 10% of total funds. For example, in a 10,000 USDT account, the maximum for each trade is 1,000 USDT.

  • Emotional Management: Avoid revenge trading after losses and stick to preset strategies.

6. Deep Understanding of Contract Trading and Future Forecasts

Today, we systematically analyzed the core mechanisms and practical skills of perpetual contracts, and the next article will explore the characteristics and arbitrage strategies of delivery contracts, including:

1. Quarterly/Monthly Cycles of Delivery Contracts.

2. 'Long and Short Game' and Price Spike Phenomena Before Delivery.

3. Differences in the Process of Physical Delivery and Cash Settlement.

Upcoming Content Preview:

Third Article: The Operational Principles of CFD Contracts and Their Differences from Traditional Futures.

Fourth Article: Analysis of Cryptocurrency Options Products and How to Hedge Risks by Buying Call/Put Options.

Through this series of articles, you will gradually master the complete knowledge system of cryptocurrency derivatives and build a robust trading strategy.

I am Ah Yue, focused on analysis and teaching, a mentor and friend on your investment journey! May everyone investing in the market sail smoothly. As an analyst, the most basic responsibility is to help everyone earn money. I am here to solve confusion, positions, and operational advice, letting strength speak for itself. When you lose direction and don't know what to do, look to Ah Yue (homepage) for guidance.