In cryptocurrency trading, perpetual contracts, as an important derivative tool, have attracted many investors due to their unique design mechanism. They retain the leverage trading characteristics of futures contracts while breaking through the expiration limitations of traditional futures, providing traders with more flexible position choices. Below, we will detail the core concepts of perpetual contracts to help investors better understand their operational logic.
Definition and Nature of Perpetual Contracts
A perpetual contract is a type of futures contract that has no expiration date, allowing traders to hold positions indefinitely until they choose to close them.
Active liquidation due to insufficient margin results in forced liquidation. Unlike traditional futures contracts that require delivery on a specific expiration date, perpetual contracts maintain the linkage between contract prices and the spot prices of the underlying assets through a unique mechanism, making them closer to the actual price fluctuations of the spot market.
Essentially, a perpetual contract is an agreement between traders based on the future price trend of the underlying asset. When investors believe that the price of the underlying asset will rise, they can choose to go long; when they believe the price will fall, they can choose to go short. The profit or loss from the contract depends on the difference between the actual price and the opening price, while also amplifying returns or risks through the leverage effect.
Funding Rate Mechanism
The funding rate is the core mechanism for maintaining price stability in perpetual contracts and is one of the key features that differentiate it from traditional futures. Its role is to balance the holding demands of both long and short parties, ensuring that contract prices do not deviate significantly from spot prices.
The funding rate is calculated every 8 hours, with its value determined by the price difference between the spot price and the contract price. When the contract price is higher than the spot price, the funding rate is positive, meaning longs need to pay funding fees to shorts; when the contract price is lower than the spot price, the funding rate is negative, meaning shorts need to pay funding fees to longs. This two-way charging mechanism incentivizes traders to adjust their positions, causing contract prices to revert towards spot prices.
It is important to note that only traders who still hold positions at the time of the funding rate settlement need to pay or receive funding fees; traders without positions are not affected. The specific value of the funding rate will dynamically adjust with changes in market supply and demand, and is usually displayed in real-time on the exchange's contract page.
Leverage Mechanism
The leverage mechanism is the key tool for amplifying returns and risks in perpetual contracts, allowing traders to control larger value contract positions with less capital. Exchanges typically offer various leverage multiples for different underlying assets, commonly 1x, 5x, 10x, 20x, 50x, and even 100x.
For example, when a trader chooses 10x leverage, they only need to pay 10% of the contract value as margin to open a position. If the price of the underlying asset moves in a favorable direction by 1%, the trader's actual profit will be amplified to 10%; conversely, if the price moves against them by 1%, the loss will also be amplified to 10%. The higher the leverage multiple, the greater the potential returns and risks.
When using leverage trading, traders need to reasonably choose the leverage multiple based on their own risk tolerance. Excessively high leverage may lead to liquidation even with small price fluctuations, resulting in significant capital losses; while excessively low leverage may fail to fully utilize the efficiency of capital.
Margin System
The margin system is an important tool for controlling risks in perpetual contracts, including two key concepts: initial margin and maintenance margin. The initial margin is the minimum amount of funds that a trader must deposit when opening a position, and its amount is determined by the contract value and the selected leverage multiple, calculated as: Initial Margin = Contract Value ÷ Leverage Multiple.
The maintenance margin is the minimum margin level that traders must maintain while holding positions. When the margin balance in the account falls below the maintenance margin due to price fluctuations, the exchange will issue a margin call to the trader. If the trader fails to add margin within the specified time, the exchange will forcibly liquidate their position to avoid greater risk losses.
The maintenance margin ratio is usually lower than the initial margin ratio, with specific values set by the exchange based on factors like the volatility of the underlying asset. For example, an exchange may set the initial margin ratio for Bitcoin perpetual contracts at 10% (corresponding to 10x leverage), with the maintenance margin ratio at 5%. When the account's margin balance falls below 5% of the contract value, it will face liquidation risk.
Mark Price and Liquidation Mechanism
Mark price is the benchmark price used in perpetual contracts to calculate unrealized profits and losses and determine liquidation status. It is not the real-time execution price of the contract but is calculated based on the weighted average price of the spot market. Using mark price instead of real-time execution price can effectively avoid unreasonable liquidations caused by market manipulation or short-term price volatility, protecting traders' rights.
When the margin balance in the account divided by the occupied margin ratio (i.e., margin rate) falls below the maintenance margin rate, the liquidation mechanism will be triggered. The exchange will forcibly liquidate the trader's position based on the mark price, and the funds obtained from the liquidation will be prioritized to cover losses. If there are remaining funds, they will be returned to the trader; if not enough to cover the losses, the trader may need to bear the risk of negative equity (some exchanges implement a negative equity sharing system).
The calculation formula for the liquidation price is: Liquidation Price = (Opening Price × (1 - Initial Margin Rate)) ÷ (1 - Maintenance Margin Rate) (taking a long position as an example). Traders can calculate the liquidation price to understand their risk tolerance range in advance and set reasonable stop-loss points.
Two-Way Trading and Closing Mechanism
Perpetual contracts support two-way trading, allowing traders to profit from both long and short positions, providing more trading opportunities for investors in different market conditions. When expecting the price of the underlying asset to rise, the trader chooses to open a long position and closes for profit when the price rises; when expecting the price to fall, they choose to open a short position and closes for profit when the price falls.
Closing a position refers to the operation where a trader settles the positions they hold, which can be divided into voluntary closing and forced closing. Voluntary closing is initiated by the trader based on their judgment, where they can choose to close at market price or limit price. Market price closing immediately executes at the best available market price, ensuring a successful close; limit price closing sets a target price, and when the market price reaches that price, it executes automatically, potentially achieving a better closing price but with the risk of not being executed.
Forced liquidation occurs when a trader's margin is insufficient, and the exchange forces a liquidation operation to control risk, usually executed at the current market price quickly, which can lead to significant losses for the trader.
Advantages and Risks of Perpetual Contracts
The advantages of perpetual contracts mainly lie in the following aspects: first, there is no expiration date limit, allowing traders to hold positions long-term, avoiding the complications of traditional futures expirations; second, through the funding rate mechanism, the contract prices are highly correlated with spot prices, reducing basis risk; third, they support high-leverage trading, improving capital efficiency; fourth, the two-way trading mechanism provides profit opportunities in both rising and falling markets.
However, perpetual contracts also come with higher risks. High-leverage trading amplifies returns but also magnifies risks, where even small price fluctuations can lead to significant losses or liquidation; the existence of funding rates can increase holding costs, especially in long-term positions where funding rates are unfavorable; market volatility and liquidity changes can lead to slippage risk, meaning the actual execution price may differ from the expected price; additionally, there are external factors such as regulatory risks and technological risks.
In summary, perpetual contracts are complex financial derivative tools, with core concepts that are interrelated and interact to form their unique operational system. Investors must fully understand these core concepts and master risk control methods before participating in perpetual contract trading, formulating reasonable trading strategies based on their own risk tolerance and trading experience to avoid losses from blind following.
