Reverse Contract Trading Guide: Mechanisms, Calculations, and Risks Explained

Inverse contracts are an important trading instrument in the cryptocurrency derivatives market, fundamentally different from the commonly seen linear perpetual contracts. In inverse contract trading, investors use cryptocurrencies (such as BTC, ETH) as collateral and settlement units, while the pricing is quoted in USD. This unique design offers advantages in specific trading scenarios but also comes with different risk characteristics.

What Are Inverse Perpetual Contracts

Inverse contracts allow traders to engage in perpetual trading without an expiration date, with trading pairs including BTCUSD, ETHUSD, BITUSD, and other major cryptocurrencies. The key feature is that prices are quoted in USD, but margin and profit/loss settlement are conducted in the underlying asset (e.g., BTC or ETH).

For example, if you want to trade a BTCUSD inverse contract, you need to hold enough BTC in your derivatives account as collateral. This is completely different from traditional USDT perpetual contracts, which use stablecoins as margin and settlement currency. Choosing to trade inverse contracts means that investors participate in both the price movements of the contract and the market risk of the underlying asset itself.

Trading Pairs, Margin, and Settlement Methods

In inverse contracts, the nominal value of each contract is at least 1 USD. Traders can flexibly set their trading size, such as buying a contract with a nominal value of $10,000. The system will automatically calculate the corresponding amount of the underlying cryptocurrency based on the current price.

Margin is maintained in a single-direction position mode, requiring traders to ensure sufficient holdings of the underlying currency in their derivatives account. Each trade also incurs fees and funding costs (periodic settlement fees for long and short positions), all paid in the underlying asset.

Inverse contracts support placing orders based on nominal amounts, allowing traders to precisely control their trading size. The contract details page displays real-time rates, funding fee timings, and other important parameters for all trading pairs.

Practical Example: Full Profit and Loss Calculation Process

Let’s understand the profit and loss mechanism of inverse contracts through a concrete example.

Suppose Trader A buys a BTCUSD inverse contract with a nominal value of $10,000 when BTC is priced at $23,000. The BTC amount required is calculated as: 10,000 ÷ 23,000 ≈ 0.435 BTC. This 0.435 BTC becomes the collateral and risk exposure for this contract.

Later, if BTC rises to $25,000 and Trader A decides to close the position, they need to buy back an amount equivalent to $10,000. The calculation is: 10,000 ÷ 25,000 = 0.4 BTC.

Comparing the BTC amounts at opening and closing, the profit is: 0.435 - 0.4 = 0.035 BTC (before deducting fees and funding costs). This difference is the trader’s actual profit, paid directly into the account in BTC.

This example clearly illustrates the core logic of inverse contracts—regardless of trading complexity, the final settlement is based on the difference in the underlying asset quantity.

Inverse Contracts vs. Linear Perpetual: Five Key Differences

Inverse contracts and linear perpetual contracts (USDT perpetuals) differ fundamentally across multiple dimensions. Understanding these differences is crucial for choosing the appropriate trading tool.

Difference 1: Margin and Settlement Currency
Inverse contracts use cryptocurrencies like BTC or ETH as margin, with profit and loss settled in the same currency. Linear perpetual contracts use USDT as both margin and settlement unit, offering a more straightforward and unified logic.

Difference 2: Calculation Complexity
Margin and P&L calculations for inverse contracts are relatively complex, involving conversions between different currencies. Linear perpetual contracts have simpler, more intuitive calculations, all expressed in USDT.

Difference 3: Profit Realization
Profits from inverse contracts are directly realized in the underlying currency. If BTC rises, profits are in BTC; if ETH rises, profits are in ETH. In contrast, all profits in linear perpetual contracts are settled in USDT.

Difference 4: Collateral Risk
Traders in inverse contracts must hold the underlying asset as collateral, meaning that even without an open position, the BTC or ETH in their account is subject to market fluctuations. Conversely, in USDT perpetual contracts, settlement is in USDT, so traders do not face the market risk of the underlying asset’s price affecting their collateral directly.

Risk Exposure Awareness: Hidden Costs of Inverse Contracts

The risk characteristics of inverse contracts need special emphasis. Since trading and settlement are conducted in the underlying asset, traders face dual market risks: one is the price risk of the contract position itself, and the other is the market risk of the collateral asset used (e.g., BTC or ETH).

For example, if a trader holds a short position in BTCUSD inverse contracts, when BTC’s price rises, the short position incurs a loss; simultaneously, the BTC used as collateral appreciates in value, creating a complex risk profile.

In contrast, linear perpetual contracts settle in USDT, allowing traders to focus solely on the contract price movements without worrying about the market risk of the collateral asset itself. Although USDT is not entirely risk-free (stablecoins may depeg), its risk is significantly lower than holding volatile assets like BTC or ETH.

For investors interested in trading inverse contracts, proper risk management is essential. Clearly understand your risk tolerance, and adjust position sizes and stop-loss settings flexibly based on market conditions. Inverse contracts offer unique trading mechanisms and potential profit opportunities, but mastering their risk logic is key to successful trading.