A Perpetual Contract is a type of derivative product that combines aspects of futures trading and spot margin-trading. Key points of differentiation for trading Perpetual Contracts are outlined below:
No expiration date: Unlike futures contracts, perpetual contracts do not have an expiration date or a specified time in the future that buyers and sellers are obligated to settle a contract. Traders can hold long or short positions for as long as they’d like (i.e., “in perpetuity”), as long as they maintain sufficient margin to avoid liquidation.
Funding Mechanism: In lieu of cash or physical settlement, perpetual contracts employ “funding” to facilitate payouts between long and short positions at various intervals. For example, if contract prices are trading at a discount to the market, funding rates will be negative and short positions will pay long positions. Conversely, if contract prices are trading at a premium to the market, funding rates will be positive and long positions will pay short positions.
Price Correlation to Underlying Spot Market: Unlike settled futures contracts, which may trade at a significant premium or discount to the underlying spot market depending on the expiration date, perpetual contracts tend to be priced in line with underlying spot market prices. Convergence between the price of perpetual contracts and the underlying spot market is achieved by a “funding” mechanism that requires long or short positions to pay the opposing side based on any decoupling in price between the contract and the underlying spot market. In this regard, funding serves as a marketplace incentive to encourage traders to take positions with positive expected value (with regards to funding); therefore, impacting the price of the contract until it converges with spot market prices.
BitMax.io Futures currently offers a single product: BTCUSDT, a bitcoin perpetual contract denominated in USDT.
Key Mechanics of Trading a Perpetual Contract:
To effectively trade Perpetual Contracts on BitMax.io Futures, a user should familiarize themselves with the following key mechanics:
Leverage: Traders can buy or sell to open a position after depositing only a fraction of the trade amount – this is in contrast to spot trading which generally requires fully funded orders. Trading on leverage can increase buying or selling power to allow for potentially higher returns; however, it also carries a high degree of risk given that it can magnify losses as well.
Position Marking: The notional value of an account’s positions as well as PnL is calculated using a robust composite price referred to as “Mark Price.” Mark Price references spot pricing from Binance, Huobi, OKEx, Poloneix, and BitMax.io to mitigate risk associated with a platform-specific market disruption.
Margin Requirements: To open a leveraged contract on BitMax.io Futures, a user must post collateral (USDT, PAX, USDC, BTC, or ETH) to their account. This collateral will contribute to the account’s Margin Rate and is used to determine how much leverage the user can trade with and at what point the account is at risk to be auto-liquidated.
Funding: Payments that occur between buyers and sellers (i.e, long positions and short positions) once every 12 hours (0:00 a.m, 12:00 p.m UTC). If contract prices trade at a discount to the market, funding rates will be negative and short positions will pay long positions. Conversely, if contract prices trade at a premium to the market, funding rates will be positive and long positions will pay short positions. Note that funding is not a fee charged by the platform, but rather a peer-to-peer facilitation of payment between platform users.
Futures Contract Details:
Details of BitMax.io Futures’ Bitcoin Perpetual Contract are summarized in the below table:
Leveraged Trading Example
Trading on leverage allows buyers and sellers to open positions after depositing only a fraction of the trade amount – this is in contrast to spot trading which generally requires fully funded orders.
Bullish traders with a positive outlook on the market can open long positions by buying contracts. Bearish traders with a negative outlook on the market can open short positions by selling contracts. Leveraged trading can increase buying or selling power to allow for potentially higher returns; however, it also carries a high degree of risk given that it can magnify losses as well.
To illustrate the potential for leveraged trading to amplify profits as well as losses, take the below comparison of two bullish bitcoin traders: Alice and Bob. Each trader has $500. Alice chooses to trade on the spot market while Bob chooses to trade a leveraged perpetual contract.
Bitcoin is priced at $5,000. Each perpetual contract is worth 1 BTC. Alice uses $500 to buy BTC priced at $5,000. Alice’s account now holds 0.1 BTC worth $500. Bob uses $500 as collateral to buy 10 contracts priced at $5,000 each. Bob’s account is now using $500 as collateral for a $50,000 long position and is therefore leveraged at 100X.
Scenario A: The price of BTC increases from $5,000 to $5,050.
Result: Both Alice and Bob are pleased with their timely purchases; however, Bob has profited significantly more from his trade. Alice’s new account value is $505. Bob’s new account value is $1,000. Bob’s profits are 100X greater than Alice’s.
Scenario B: The price of BTC decreases from $5,000 to $4,950.
Result: Both Alice and Bob are upset with their untimely purchases; however, Bob has lost significantly more from his trade. Alice’s new account value is $495. Bob’s new account value is $0. Bob’s losses are 100X greater than Alice’s.
For further information on Profit net Loss (“PnL”) calculations and methodology, please see the PnL section.