1. Definition and classification of contract trading
Contract trading is a type of financial derivative that allows investors to profit from predicting price movements without actually holding the underlying asset. Its core mechanism is that both parties agree to trade the underlying asset (such as Bitcoin or Ethereum) at a specific price at a future time. Cryptocurrency contracts are mainly divided into perpetual contracts and futures contracts, with the core difference being whether they have an expiration date:
1. Perpetual contracts
No expiration date: Can be held indefinitely. The funding rate mechanism anchors contract prices to spot prices to avoid long-term deviation. For example, if the spot price of Bitcoin is 50,000 USDT, while 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 return to the spot anchor.
Funding rate: Settled every 8 hours, the rate is determined by the market's long-short ratio. For example, when the market is bullish (60% long positions), longs pay the rate to shorts, usually between 0.01% and 0.05%.
Applicable scenarios: Suitable for long-term holding or high-frequency traders, without worrying about forced delivery risks.
2. Futures contracts
Fixed expiration date: Must settle at the agreed date (such as the end of the quarter) at the spot price or through physical delivery. For example, a quarterly futures contract may settle at the expiration date using the Bitcoin spot index price; if the position is not closed, it will automatically be delivered.
High price volatility: Easily affected by market sentiment before delivery, which may cause 'spike' phenomena (sharp price fluctuations in a short time). For example, before the Bitcoin quarterly contract delivery 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 continuous payment of funding rates; futures contracts are suitable for specific time windows but require prevention of delivery risks.
2. Core concepts and operations of contract trading
1. The concept of 'Zhang' and position calculation
'Zhang' is the minimum trading unit of a contract, 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 the value of 100 contracts = 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 leverage rises to 100x, the margin drops to 50 USDT, but the forced liquidation price is closer to the opening price.
2. Practical examples of opening and closing positions
Opening operation:
Buy long: Expecting the price to rise. For example, if the current price of BTC is 50,000 USDT, the user buys 10 long contracts with 50x leverage, occupying margin = 10×0.001×50,000÷50=10 USDT.
Sell short: Expecting the price to fall. For example, if the current price of ETH is 2,500 USDT, the user sells 5 short contracts with 20x leverage, occupying margin = 5 × 0.01 × 2,500 ÷ 20 = 6.25 USDT.
Closing operation:
Market closing: Quickly transact at the best current price, suitable for times of severe market fluctuations. For example, if BTC price suddenly drops to 48,000 USDT, the user chooses to close a long position at market price to avoid further losses.
Limit closing: Set a target price for closing. For example, if the opening price of an ETH long position is 2,500 USDT, set a limit price of 2,600 USDT to close, waiting for the price to reach and automatically execute.
3. Triggers and responses for forced liquidation
Forced liquidation mechanism: When the margin rate falls below the maintenance level, the system automatically closes the position. For example, if the opening price of a BTC long position is 50,000 USDT and the maintenance margin rate is 0.5%, the forced liquidation price is calculated as:
Forced liquidation price = Opening price × Leverage / (1 + (Leverage × Maintenance Margin Rate)) = 50,000 × 50 / (1 + (50 × 0.5%)) = 48,543 USDT,
If the mark price falls to 48,543 USDT, the position will be forcibly liquidated.
Response strategy:
Use isolated margin mode to mitigate risk and avoid total liquidation.
Set a stop loss order in advance, for example, at 48,500 USDT.
3. Calculation of transaction fees and funding rates
1. Transaction fee calculation model
Transaction fees include trading fees and funding costs (only for perpetual contracts):
Transaction fees:
Maker (Limit order): 0.02%-0.05%, encouraging liquidity provision.
Taker (Market order): 0.04%-0.07%, as it consumes liquidity and incurs higher rates.
For example, opening 100 BTC contracts (worth 5,000 USDT), Taker rate is 0.05%, transaction fee = 5,000 × 0.05% = 2.5 USDT.
Funding costs: Settled every 8 hours, the cost = position value × funding rate. For example, holding a long position worth 10,000 USDT with a funding rate of -0.03% will incur a charge of 3 USDT per cycle.
2. Arbitrage strategies for funding rates
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 obtained monthly.
Negative rate arbitrage: Hold a long position in perpetual contracts and short the spot, suitable for bearish market sentiment.
4. Strategies for taking profits and cutting losses in practical applications
1. The core logic of taking profits and cutting losses
Take profit: Lock in profits to prevent market reversals. For example, if the opening price of a BTC long position is 50,000 USDT, set a take profit price of 52,000 USDT (a 4% increase).
Stop loss: Control losses to avoid liquidation. For example, if the opening price of an ETH short position is 2,500 USDT, set a stop loss price of 2,550 USDT (a 2% drop).
2. Setting methods and examples
Fixed point method:
Example: If the current price of DOGE is 0.1 USDT, after going long, set take profit at 0.12 USDT (20% profit) and stop loss at 0.095 USDT (5% loss).
Dynamic tracking method:
Example: If a BTC long position rises from 50,000 USDT to 55,000 USDT, move the stop loss price from 48,500 USDT to 53,000 USDT to protect unrealized gains.
Technical indicators method:
Example: Set stop loss based on support level. If BTC price falls below the MA30 moving average on the 4-hour chart (currently 49,500 USDT), stop loss is triggered.
3. Exchange operation guide (taking Binance as an example)
Step 1: On the position page, select 'Take profit and stop loss', enter the trigger price and order price.
Step 2: Choose the trigger type (mark price or latest price). For example, mark price is more resistant to manipulation and suitable for long-term holding.
Case example: If the opening price of an ETH long position is 2,500 USDT, set the take profit trigger price at 2,600 USDT (order price 2,590 USDT) and the stop loss trigger price at 2,450 USDT (order price 2,455 USDT).
5. Contract protection funds and risk control
1. The role of the contract protection fund
Funding source: A portion of each transaction fee is allocated, typically 0.005%-0.01%. For example, if a certain exchange has a daily trading volume of 1 billion USD, it extracts about 50,000-100,000 USD for the protection fund daily.
Use case: To compensate for losses from liquidation. For example, if User A suffers a loss exceeding their margin due to liquidation, the fund will prioritize compensating the counterparty.
2. Risk control recommendations
Leverage selection: Beginners are advised to use 3-5x, avoiding high leverage (such as 100x) that leads to sensitivity of forced liquidation prices.
Position management: No single position should exceed 10% of total funds. For example, for 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. The next article will delve into the characteristics and arbitrage strategies of futures contracts, including:
1. The cyclical patterns of quarterly/monthly contracts.
2. The 'long-short game' before delivery and price spike phenomena.
3. Differences in the processes of physical delivery and cash settlement.
Upcoming content preview:
Part 3: The operating principles of CFDs (Contracts for Difference) and the differences from traditional futures.
Part 4: 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.
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