Perpetual contracts are a popular financial instrument that allows traders to take advantage of the changes in the price of an underlying asset without taking physical ownership of the asset. These contracts are often used in derivatives trading, a complex and high-risk form of trading that requires a deep understanding of financial markets and instruments.
So, how do perpetual contracts work?
Perpetual contracts are essentially futures contracts that do not have an expiration date. Unlike traditional futures contracts that have a set expiration date, perpetual contracts allow traders to take positions in the market without having to worry about closing their positions before the contract expires.
Perpetual contracts are settled in cryptocurrency and are available for a wide range of underlying assets, including cryptocurrencies, forex, commodities, and indices. The price of the contract is usually determined by the price of the underlying asset and the leverage used to trade the contract.
Traders can take long or short positions in perpetual contracts. A long position allows a trader to profit from an increase in the price of the underlying asset, while a short position allows a trader to profit from a decrease in the price of the underlying asset.
One of the unique features of perpetual contracts is that they use a funding mechanism to ensure that the price of the contract stays close to the price of the underlying asset. This funding mechanism is designed to prevent traders from holding large positions in a contract for an extended period and to maintain stability in the market.
Perpetual contracts are highly leveraged, which means that traders can increase their profits by using less capital. However, this also means that traders can lose more than their initial investment if the price of the underlying asset moves against their position.
In conclusion, perpetual contracts are a complex financial instrument that requires a deep understanding of financial markets and instruments. While they offer traders an opportunity to profit from changes in the price of an underlying asset without taking physical ownership of the asset, they also come with high levels of risk. It`s important for traders to do their own research and to have a solid trading plan before entering into perpetual contracts.