What Is Perpetual Contracts ? with example

What Is Perpetual Contracts ? 

A perpetual contract is a derivative similar to a futures contract but without an expiry date.

Perpetual contracts are a type of derivative that lets you easily speculate on the price of an asset. 

Similar to futures, you use tokens as collateral to open a leveraged position.

 If you speculate that the price of that asset will go up and it indeed goes up, when you close your position you will receive more tokens than you put in. 

Vice versa, if the price goes in the opposite direction, upon closing your position you will receive less than the amount you put into this position. 

 The major difference between futures and perpetual contracts is the expiration.

 Futures contracts are settled after a pre-set period, whereas perpetual contracts have no expiration or settlement date, meaning you can hold a contract for an indefinite amount of time.

For traditional futures contracts, the contract’s price gradually converges with the underlying asset’s spot market price as the expiry date approaches.

 Since they do not have an expiry date, perpetual contracts have a premium called a funding payment that is paid between traders to help keep the price in line with the spot market.

 If the contract price is above the spot price, traders holding long positions will pay traders holding short positions, and vice versa. These payments occur at regular intervals (typically 1 hour or 8 hours). 

Due to their ease of use and flexibility, perpetual contracts are the most traded instrument in the cryptocurrency space, with trillions of dollars in trading volume each day.

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