Perpertual Swaps vs Futures Trading

Crypyo trading is all the rage these days. From those dreaming of their lambos or desiring to become the next crypto billionaire. Depending on a trader’s style, there are different types of trading. There is scalping for those looking to make quick gains, day trading for those looking to profit over the course of a trading day, position trading for those looking to HODL long term, and several others. What’s important is looking for a style one that matches the trader’s personality.

With this in mind, cryptocurrency exchanges have been popping up all over the place. Everything from altcoin trading to futures trading and soon…security tokens? Most exchanges cater to the simple needs of traders who just want to buy low, sell high. But there are a few who meet the advanced needs of professional traders. Here they dabble in derivatives, trading futures and perpetual swaps. This article is aimed at a comparison between these types of products. The exchanges in question will be BitMex and Deribit.

In finance, derivatives are securities with a value that is derived from another asset. For cryptocurrency derivatives, the underlying value is usually bitcoin. Futures contracts are derivatives written with a speculative price, expected to happen in the future. Traders place a bet (position) speculating what the price of Bitcoin will be at a specific date in the future. Positions are usually settled within 30 minutes, depending on the exchange, which uses average prices close to the speculative price. Once average price is gotten, the position is paid off, that is, settled. A position that is settled is deemed gone or closed.

Ever in search for profit, traders did not like the fact that their positions are time sensitive, that is having expiry. The solution to this was the launch of perpetual swaps by exchanges. As the name implies, perpetual means lasting forever in the same condition, so perpetual swaps are futures contracts that keep renewing continuously.

On BitMex, perpetual swaps have an 8 hour cycle. A trader who wishes to keep their position open must be ready to pay rent (interest rate) every 8 hours. The higher the trader’s leverage, the higher the rent that would be charged. Funding rate (interest rate) is calculated every minute, based on the actual (premium) or discount price of the perpetual swap contract and value of the underlying BTC in the last 8 hours. Position value multiplied by funding rate becomes the funding payment to be made by trader.

There are two types of funding rates: negative funding rate and positive funding rate. Negative Funding Rate is when shorts pay longs. Here, it means in the last 8 hour, perpetual swaps contracts were trading at a discount compared to the value of the underlying BTC, necessitating traders who were shorting to pay for their position. Perhaps, a good thing about negative funding rate is that a trader who decides to trade against the trend gets rewarded. Positive Funding Rate is the direct opposite of the above, when longs (traders betting on prices going up) pay for shorts (traders betting price is going down).

Although they are both types of derivatives, there are some differences between perpetual swaps and futures contracts. Most notable difference between both derivatives is that one has an expiry date while the other (perpetual swaps) has no expiry date. Perpetual swaps “mimic a margin-based spot market and hence trade close to the underlying reference Index Price,” while futures contracts may trade at significantly different prices due to basis.”

Both types of derivatives are risky and meant for advanced traders. However, there is no denying the huge profit one can get from trading crypto derivatives.

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