Derivative contracts have long been a staple in trading, offering a multitude of ways to trade against underlying asset’s price action. Since their inception, they have played a great role in trading and wealth-building verticals in the traditional financial market. Today, the emerging cryptocurrency market has come up with a variant of derivative product that allow market participants to take their crypto trading activities to new heights. Only, there is a big difference in this emerging piece of crypto fin-tech. It is a revolutionary derivative product that comes in the form of a perpetual trading asset compared to traditional futures which expire at regular fixed intervals.
What is this Perpetual Asset and How does it work?
This new derivative product is known as Perpetual Futures and it enables traders to speculate on the price movements of an underlying asset without the constraints of an expiration date. This is made possible owing to a unique feature called the funding rate mechanism. This mechanism helps maintain consistency and prevent substantial price fluctuations.
The funding rate is the difference between the mark price of the perpetual futures market and the spot market price of the underlying asset. This helps ensure that the funding mechanism aligns the futures market price with the current market spot price of the underlying asset. This is achieved by making users with long positions pay a premium to users holding short positions when the funding rate is positive and vice versa when the funding rate is negative.
How does Perpetual Futures differ from Traditional Futures?
Traditional futures contracts involve physical delivery or settlement of the underlying asset at a future date. In contrast, perpetual futures never expire, providing flexibility and eliminating the need for constant position adjustments. Instead, the settlement of Perpetual Futures happens in the form of cash settlement of equal value of the underlying asset. The funding rate replaces the expiration date, promoting market convergence at regular intervals and reducing potential price disparities.
Advantages of Perpetual Futures -
- No Expiration Date: Traders can maintain positions indefinitely, eliminating the need for constant rollovers.
- Leverage: Perpetual futures offer significant leverage, enabling traders to control larger positions with less capital.
- Funding Rate Mechanism: The funding rate ensures the perpetual futures price stays close to the spot price, reducing price discrepancies and helping limit the extent of loss in case of a sudden and sharp cascading decline in the price of the underlying asset.
Trading Strategies for trading with perpetual futures -
- Speculation: Take long or short positions based on expectations of future price movements.
- Trend Following: Use technical analysis to identify and follow market trends for strategic entry and exit points.
- Hedging: Protect existing positions by using perpetual futures contracts as a hedge against potential price drops.
- Arbitrage: Exploit price discrepancies between perpetual futures and spot markets for profitable trades.
Perpetual futures in cryptocurrency trading offer unparalleled advantages, from flexibility to leverage. As you may have seen from our last few newsletters, Kana Labs is testing our iteration of Perpetual Futures called “Switch”. This is a tokenised derivative product that exists in the form of Long Switch and Short Switch Tokens while the underlying working mechanism remains the same.
Traders can place speculative bets based on the price movement of assets like Bitcoin and Ethereum. We just completed the closed beta test with our partners and beta-testing participants and are making some modifications based on feedback we received from them. Soon, the open beta testing for “Switch” will go live. Please “click here” to register and be the first to try out our derivative product on both our open beta testing and once we go live in Mainnet.
As we gear up to go live with Switch, you can capitalise on our open beta test phase to try out our product in the testnet and prepare your strategies for when we go live on the mainnet. Embrace the future of trading with perpetual futures — where opportunities are limitless, and expiration dates are a thing of the past.
