Differences Between Perpetual Contract and Traditional Futures Contract

Traditional Futures Contract

A traditional futures contract is an agreement to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future. These contracts are standardized and traded on futures exchanges. They bind the contract buyer to purchase, and the contract seller to sell the commodity or asset unless the contract is closed prior to expiration.

Characteristics of Traditional Futures Contracts:

• Expiration Date: Each contract has a set expiration date, which is the date by which the underlying asset must be delivered or settled.

• Physical or Cash Settlement: Upon expiration, the contract may be settled by physical delivery of the commodity, like wheat or gold, or via cash settlement.

• Carrying Costs: Holding a contract may incur carrying costs such as storage, insurance, and financing, which can affect the pricing of the contract.

• Margin Requirements: Traders must put down a margin deposit to enter into a contract, which is a fraction of the contract's total value.

• Leverage: Futures contracts provide leverage, as the trader can control a large contract value with a relatively small amount of capital.

The traditional futures market plays an important role in price discovery and risk management for various industries. However, unlike Perpetual Contracts, they have a finite lifespan and thus require rolling over or settlement upon reaching expiration.

Perpetual Contracts in Cryptocurrencies

Perpetual contracts in cryptocurrencies are a type of derivatives contract similar to traditional futures contracts, but with a few key differences. Unlike traditional futures, perpetual contracts do not have an expiration date, meaning positions can be held indefinitely provided the trader can maintain the required margin.

Characteristics of Perpetual Contracts in Cryptocurrencies:

• No Expiration Date: Traders can hold positions for as long as they want without the need to roll over contracts.

• Funding Rate: To anchor the market price to the spot price, a funding rate is exchanged between longs and shorts periodically.

• Margin and Leverage: Similar to traditional futures, traders can leverage their positions, but margin requirements may vary based on the platform and market volatility.

• Price Discovery: These contracts help in discovering the price of the underlying cryptocurrency without the need for actual possession.

• Cash Settlement: Perpetual contracts are settled in cash (cryptocurrency), meaning physical delivery of the asset is not required.

Perpetual contracts are popular on cryptocurrency exchanges and offer traders a way to speculate on the price movements of cryptocurrencies without the need to ever take delivery of the actual asset.