Maximize Profits and Minimize Risks with Perpetual Trading
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Right from the time when Bitcoin was introduced in 2008 to date, crypto trading has been greatly evolving. Despite ups and downs in the market, crypto trading has shown significant progress in terms of technology, revenues and user base. The crypto world is quickly learning from mistakes to improve and excel. One of the recent trends in crypto markets is perpetual trading.
Perpetual trading is similar to futures trading but differs in the contract period. In Futures trading, you can set a price for an asset and a date to execute that contract. Perpetual contracts are a type of derivatives that are timeless with no settlement or expiry date which means you can indefinitely hold them or trade them at your will. The advantage of holding leveraged positions without being burdened by the contract expiry date is what makes perpetual trading popular in recent times.
Before investing in Perpetual trading, it is important to understand the following basic concepts:
Perpetual Funding Rate: The price stability in perpetual trading is maintained by the perpetual funding rate. It defines a value to the deviation of the contract from the target price of the underlying asset to maintain price stability. The funding rate is based on Index price and Mark price
Index Price: The index price is calculated by taking the average spot price of the underlying asset on various exchanges.
Mark Price: The mark price gets its value from the Index price and acts as a reference point for calculating the funding rate.
Interest Rate: It is a constant value that is based on the underlying asset and is used in calculating the funding rate.
Premium Component: The difference between the Mark price and the perpetual price is quantified by the premium component. The interest rate and premium component are added to the funding rate.
BitMEX was one of the initial exchanges that successfully introduced Perpetual trading which is why most exchanges that trade perpetuals use the BitMEX model to calculate the funding rate.
Macro Trends in Perpetual Trading
Crypto markets are now moving towards crypto-derivatives as they reduce the risks in crypto trading while generating higher profits. While some exchanges such as C-Trade and dYdX are purely derivative-focused, other crypto exchanges are now including derivatives in the portfolio. For instance, Huobi included perpetual trading in March 2020 because they believed that the unique USP of perpetual trading is to perform well in volatile market conditions while creating arbitrage. KuMEX and Bybit followed Huobi in the same month by introducing USDT perpetual contracts to their derivatives portfolio.
The largest crypto exchange Binance also introduced perpetual trading and now offers six pairs to choose from. In 2019, almost 80% of futures trading accounted for crypto trading. The year 2020 was no different. The year 2021 is turning out to be the year of perpetual trading.
Top 3 Platforms to Trade Perpetuals
Here are the top 3 exchanges that offer Perpetual trading:
dYdX is a smart-contracts based derivatives platform that is built on programmable infrastructure and uses a non-custodial perpetual trading model. It is powered by Starkware for increased scalability and privacy. dYdX’s first contract was about tracing BTC/USD. The supported collateral is USDC and the payout curve is linear. It uses the MakerDAO oracle for price feeds.
You can check out more details about the dYdX exchange here: https://dydx.exchange/
BitMEX is a popular perpetual trading exchange. It is one of the first exchanges to introduce this concept. For this reason, most exchanges follow its perpetual trading model. Perpetual Swap is a product introduced by BitMEX in 2019 that saw a huge success with an 8% annual interest in shorts. The exchange daily trading volume has touched $1 billion beginning 2020. BTC is the supported collateral on BitMEX and the maximum leverage is 100x.
Visit BitMEX exchange here: https://www.bitmex.com/
Binance is a popular exchange that uses the Vanilla perpetual trading model wherein margin and settlement is based on the quote currency. The perpetual trading was started on 9th Sep 2019 for the product BTCUSDT and within 12 months it became one of the largest trading exchanges covering $200 billion quarter volume. The supported collateral is USDT and BUSD and the maximum leverage is 125x.
Visit Binance Perpetual trading here: https://www.binance.com/en/futures
Perpetual Trading Strategies
When rightly done, perpetual trading offers great profits. It is important to follow certain basic strategies to fully leverage this trend. Firstly, perpetual trading is different from traditional crypto trading. So, you need to take time to understand the basic concepts of perpetuals before investing in them. You should know how the funding rate is calculated, what is the interest rate and premium component, how the index price and mark price is fixed etc. In addition, you should have a basic understanding of stock market price fluctuations, policies and be updated with Bitcoin-related news.
Secondly, the biggest USP of perpetual trading is the absence of an expiry date for a contract. So, take advantage of this feature and smartly wait and close the contract when markets are in your favour. Cashing in at the right time is important too. Thirdly, as with traditional trading strategies, diversification of your portfolio is recommended. By spreading your investments across multiple products, you can avoid the risk of making losses. Though there is no expiry date on these contracts, your investments might be subjected to liquidation that will incur additional costs in the form of fees.
Investing more than you can afford is a big red mark. By holding the contract for longer periods, you might end up paying more. Instead, take advantage of the leverage feature to gain more profits. It is important to choose the right perpetual trading exchange. A derivative-focused exchange will have a well-designed funding rate model so that it can sustain price fluctuations and maintain price stability. Moreover, a reliable trading exchange handles server issues, scalability and cybersecurity well.
Perpetual trading is the latest buzz in crypto markets in recent times. People who take advantage of this trend early are sure to reap great profits!