Deepen Your Understanding of Perpetual Contracts: Concepts, Mechanisms, and Practical Guide

Futures contracts are an important tool in financial derivatives, referring to agreements where both parties commit to buy or sell a specific digital asset at a predetermined price at a future date. Compared to perpetual contracts’ indefinite duration, futures contracts have a clear expiration date and delivery obligations, making them a preferred instrument for many investors to hedge risks and implement strategic trades.

What is a Futures Contract? Starting with the Basic Concept

The core idea of a futures contract is straightforward. Suppose a futures agreement stipulates delivering 5 Bitcoins at a price of $20,000 at a certain date. On the delivery day, the seller must sell the corresponding amount of Bitcoin at the agreed price, and the buyer must purchase it at that price, regardless of how the spot market price fluctuates at that time.

Unlike spot trading, which settles immediately, futures introduce a time dimension, allowing investors to lock in future transaction prices in advance. This is helpful for hedging risks, predicting price trends, or executing complex trading strategies. It’s also worth noting that both parties can choose to close their positions before the delivery date, without waiting until the contract expires.

Key Features of Futures Contracts

Futures contracts have several critical features in their mechanism design:

Contract Value Setting: Typically, one contract corresponds to a value of $1. For example, if the current BTCUSD price is $10,000, holding a long position of 20,000 contracts is equivalent to holding a long position of 2 BTC.

Cash Settlement: Futures are settled in cash rather than physical delivery, meaning investors do not need to hold or deliver actual digital assets but settle the difference in funds based on price movements.

Fee Structure: Futures are usually divided into market makers and takers, with varying fee rates. Common fee levels range from approximately 0.02% to 0.055%, depending on the platform.

Liquidation Mechanism: When a position incurs losses that reduce the margin below the required level, a liquidation is triggered. In isolated margin mode, liquidation is triggered by the mark price; in cross margin or portfolio margin modes, it occurs when the account’s maintenance margin ratio reaches 100%.

Price Limits: To prevent abnormal volatility, futures contracts typically set price fluctuation limits. The buy price generally does not exceed 105% of the latest market price, and the sell price is not lower than 95% of the market price.

Futures Contracts vs Perpetual Contracts: Core Differences

Many newcomers often confuse futures contracts with perpetual contracts. The fundamental differences are:

Time Limit: Futures contracts have a clear expiration date, whereas perpetual contracts are theoretically indefinite. When a futures contract expires, all positions must be settled within the specified time, and traders wishing to continue holding positions need to switch to the next contract cycle.

Funding Rate: Perpetual contracts usually charge a funding rate to maintain the price alignment between spot and futures markets, whereas futures contracts do not have a funding rate concept. During holding, there are no periodic payments or receipts related to funding.

Margin Sharing: Many platforms allow futures and inverse contracts to share the same margin account, enabling traders to switch between different contract types with a single wallet.

Why Trade Futures Contracts?

Futures contracts offer unique advantages over other derivatives:

Clear Delivery Time: The contract cycle is well-defined, allowing investors to plan their holding periods and exit strategies precisely, avoiding the time costs associated with indefinite positions in perpetual contracts.

No Funding Rate Burden: Unlike perpetual contracts that require periodic funding payments or receipts, futures contracts do not impose such costs during the holding period, making costs more transparent and manageable.

Insurance Fund Protection: Many platforms share insurance pools between futures and inverse contracts, providing an additional layer of risk protection for investors, especially in extreme market conditions.

Flexible Margin Usage: The shared margin mechanism allows investors to quickly switch strategies across different contracts, improving capital efficiency.

Practical Tips for Trading Futures Contracts

When trading futures, investors should pay attention to the following aspects:

Choose the Appropriate Contract Cycle: Futures are typically set quarterly (e.g., end of each quarter) or monthly (end of each month). Select contracts aligned with your trading cycle to avoid forced settlement at inconvenient times.

Monitor Liquidation Risks: Regularly check your margin ratio to ensure sufficient buffer during market volatility, and be alert to potential liquidations.

Calculate Delivery Costs: During the delivery period, a delivery fee (generally around 0.05%) is usually charged. Investors should factor this into their cost considerations beforehand.

Flexible Closing Strategies: If your position moves against you or market signals turn unfavorable, you can close your position at any time before the delivery date, without needing to hold until settlement.

Futures contracts are powerful tools for risk hedging and strategic trading, especially attractive to investors who want precise control over trading duration and costs. By understanding their core mechanisms and operational points, investors can better leverage futures contracts to navigate complex market environments.