📚Perpetual Futures 101

Perpetual futures are financial instruments that allow traders to speculate on the future price of an asset, such as cryptocurrencies, without actually owning the asset.

What are perpetual futures?

Perpetual futures are agreements to buy or sell an asset at a future price, but unlike traditional contracts, they never expire. This allows traders to keep their positions open indefinitely, provided they have enough margin (collateral) to cover potential losses. Traders can open "long" positions (betting the price will increase) or "short" positions (betting it will decrease).

Key Characteristics

• No expiration date: Perpetual contracts can be held indefinitely, unlike traditional futures that expire on a specific date.

• Leverage: Traders can use leverage to control larger positions with less capital, increasing capital efficiency.

• Funding rates: A system to keep perpetual futures prices close to the actual market price (spot price) through regular payments between traders holding long and short positions.

Key Terms

• Mark Price: The mark price is a reference price used to determine when a position is at risk of liquidation. It is derived from the spot price across several exchanges, weighted to prevent manipulation and better reflect the actual market value of the asset.

• Liquidation Price: The liquidation price is the specific price point at which the exchange automatically closes (liquidates) a trader's position. This occurs when the trader’s margin balance falls below the maintenance margin due to market movements. Liquidation ensures the platform recovers enough funds to cover potential losses.

• Initial Margin: The minimum amount of collateral a trader must deposit to open a leveraged position.

• Maintenance Margin: The minimum collateral required to keep a position open. If the margin falls below this level, the position canbe liquidated.

• Collateral Ratio: The collateral value (margin) ratio to the total position size. It helps determine the level of leverage a trader is using and whether they are at risk of liquidation. Higher collateral ratios imply lower leverage and reduced risk.

• Leverage: Leverage allows traders to control a larger position than the initial capital they provide. For example, 10x leverage means that with $1,000, a trader can take a $10,000 position. While leverage amplifies potential profits, it also increases the risk of losses and also the risk of liquidation.

• Funding rates: The funding rate is a fee exchanged between traders holding long and short positions. It ensures that the perpetual futures price remains close to the underlying asset's spot price. If the funding rate is positive, long positions pay shorts, and if it's negative, shorts pay longs. The rate incentivizes traders to bring the futures price closer to the spot price.

• Funding Interval: The funding interval is the regular period (every 8 hours) at which the funding rate is calculated, and payments are exchanged between long and short positions.

• Cross-margin: Cross margin allows all the funds in a trader’s account to be used as collateral. This means that if a position is at risk of liquidation, funds from other positions or the available balance can be used to avoid liquidation. It spreads the risk across all open positions.

• Isolated Margin: Isolated margin restricts the margin used for a particular position to a specific amount. Even if the position is liquidated, only the funds allocated for that specific position are at risk. This provides more control over the potential loss but limits the ability to prevent liquidation by using other available funds.

• Unrealized PnL: Unrealized PnL refers to the profit or loss of an open position that has yet to be closed. It helps traders see how much they would gain or lose if they closed the position at the current market value.

• Realized PnL: Realized PnL is the profit or loss a trader has made after closing a position. It reflects a trade's actual gain or loss, excluding any open (unrealized) positions.

• Position Size: It refers to the total value of the contract that a trader controls, which is influenced by the leverage used. For example, with 10x leverage, a $1,000 initial margin would result in a $10,000 position size.

• Market and limit orders: A market order allows the trader to buy or sell immediately at the current best available price, while a limit order allows the trader to buy or sell at a specific price or better.