A perpetual contract is a kind of derivatives trading agreement. It is also known as a perpetual swap or perpetual future.
It is a type of derivative financial instrument commonly used in cryptocurrency trading, usually a contract between two parties to buy or sell an asset (in our case, a cryptocurrency) at a specified price, but with no predetermined expiration date.
BDX is listed on the USDT perpetual futures market on the Deepcoin exchange.
Futures vs Perpetual Futures Contracts
The most distinct difference between Futures contracts and Perpetual Futures contracts is that futures contracts have a predetermined expiration date while the latter doesn’t.
However, there are other differences between them such as,
Using Perpetual Contracts As A Hedge Against Price Fluctuations
Let’s take a look at a simple hedging strategy that can be used during volatile markets.
Scenario: Hedging Risk in Perpetual Futures Trading
Meet Alex, a financial trader with a keen interest in derivatives trading. Alex has been actively trading perpetual futures contracts to capitalize on price movements in the cryptocurrency market. Recently, Alex has accumulated a substantial amount of Bitcoin (BTC) through trading activities and is concerned about potential downside risks.
To manage this risk, Alex decides to use perpetual futures contracts as a hedging strategy. Since Perpetual futures are derivative instruments that closely track the spot price of an underlying asset like Bitcoin and unlike traditional futures contracts, perpetual futures don’t have an expiry date, this makes them suitable for ongoing risk management.
Current Situation:
- Alex holds a significant amount of Bitcoin and is concerned about potential price declines.
- Current BTC price: $70,000.
Objective:
- Hedge against potential downside risk while maintaining exposure to the upside.
Execution of the Strategy:
1. Opening a Short Perpetual Futures Position: Alex decides to open a short position in BTC perpetual futures contracts equivalent to the amount of Bitcoin in their portfolio. By doing so, Alex can profit from the potential decrease in the Bitcoin price, effectively offsetting the losses on the physical Bitcoin holdings.
- BTC holdings: 100 BTC
- Opening short position in BTC perpetual futures: 100 contracts.
2. Monitoring the Market: As the market evolves, Alex keeps a close eye on both the spot market and the perpetual futures market. If the spot price of Bitcoin decreases, the profit from the short perpetual futures position can help mitigate the losses on the physical BTC holdings.
3. Adjusting the Position: If the spot price continues to decline, Alex may choose to adjust the size of the short perpetual futures position or close it out partially to secure profits. On the other hand, if the market sentiment turns bullish, Alex might decide to close the short position and benefit from the appreciation of the physical Bitcoin holdings.
4. Risk Management: Throughout this process, Alex maintains a risk management strategy by setting stop-loss orders on the short perpetual futures position to limit potential losses. Additionally, Alex considers factors such as market news, technical analysis, and overall market trends to make informed decisions.
By using perpetual futures contracts for hedging, Alex aims to navigate the volatile cryptocurrency market, manage risks effectively, and optimize the overall performance of their portfolio.
Other trading strategies employed in perpetual trading:
Traders employ several strategies using perpetual contracts. A few of them include,
- Speculative Trading
- Leverage Trading
- Hedging
- Arbitrage Opportunities
- Funding Rate Income
- Risk Management
- Liquidity Provisions
- Market Making
- Continuous Trading on Cryptocurrency Markets
BDX-USDT Perpetual Contracts on Deepcoin Exchange
Deepcoin Exchange offers BDX-USDT perpetual contracts, providing traders with a seamless and dynamic platform for cryptocurrency derivatives trading. Here’s why BDX-USDT perpetual contracts on Deepcoin Exchange stand out:
- Continuous Trading: Engage in perpetual trading without the constraints of expiration dates. BDX-USDT contracts allow ongoing market participation.
- Flexibility: Traders can enter and exit the BDX-USDT perpetual contract at any time making them a flexible instrument for speculation and hedging.
- Leverage Opportunities: Enjoy the benefits of higher leverage, enhancing your trading potential in the BDX-USDT perpetual contracts on Deepcoin Exchange.
- Funding Rate Mechanism: Experience a sophisticated funding rate mechanism aligning contract prices with the underlying asset’s market value, optimizing trading strategies.
- Consistent Liquidity: Deepcoin Exchange ensures consistent liquidity in BDX-USDT perpetual contracts, providing a stable trading environment compared to traditional futures.
- Seamless Hedging: Utilize BDX-USDT perpetual contracts as a hedging tool against market uncertainties, managing risks effectively in the ever-changing cryptocurrency landscape.
- Advanced Risk Management: Take advantage of advanced risk management features, including stop-loss orders, to safeguard your positions while navigating the dynamic crypto market.
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Disclaimer: The information provided in this article is not a solicitation for investment, nor is it intended as investment advice, financial advice, or trading advice. It is strongly recommended you practice due diligence, including consultation with a professional financial advisor, before investing in or trading in cryptocurrency spot, perpetual and other derivatives markets.
