Perpetual swaps are cryptocurrency futures contracts without an expiry date. Similar to futures contracts, a perpetual swap derives its value from the underlying crypto asset. The perpetual contract hence, enables traders to speculate on the underlying cryptocurrency’s future price movements.
Since perpetual contracts don’t expire, a price anchoring mechanism called funding rates are required. If the price of the perpetual swap is higher than the spot rate, the long buyers of the perps will need to pay a funding fee to the short sellers. The inverse happens when the perpetual contracts are trading below the underlying asset’s market rate. The funding rate allows prices to trend closely with the spot trading price in real time.
Please note that the funding fee you pay or receive will depend significantly on the size of your open positions and the underlying crypto asset. Traders should pay close attention to funding rates of their open positions as they may pay or receive a funding fee for holding a position past the designated funding timestamp.
Traders are required to put up an initial margin as collateral to open positions. The amount of collateral needed for your position is determined by your leverage and the size of the position being opened. Maintenance margin is the minimum margin requirement to hold a position, failing which liquidation will be triggered by the system.
To understand perpetual swap contracts, you need to be aware of the following:
- You are not buying or selling cryptocurrencies
- You are buying or selling cryptocurrency derivative contracts
- You will pay or receive a funding fee for holding a position past the funding period
- You will need to put up initial margin as collateral to sustain your position
- Liquidation will be triggered by the system when the maintenance margin is insufficient to sustain the position
Learn how to trade with your Flipster account in the video guide: