Trading crypto assets or cryptocurrencies can be done in many different ways. One of these ways is perps or perpetual swaps or perpetuals.
Perps are a form of derivatives contract that allows traders to take directional (long or short) positions on the future price of an underlying asset without necessarily owning the underlying asset.
What are the features of a perps market?
The perps market is very different from traditional futures markets. It has a few peculiar features, most of which are totally absent in traditional futures contract markets.
Leverage
In a Leveraged trade, a trader can take a larger position, either long or short, with less initial capital. For instance, imagine a trader with $100 who wants to open a position on the future price of Coin A using perpetual contracts on Platform X, which supports leveraged trading.
On Platform X, the leverage available for Coin A ranges from 1x to 50x. If the trader opts for 10x leverage, their position size is increased tenfold. This means that instead of trading with $100, the trader controls $1,000 worth of Coin A.
If the market moves in the trader’s favor, their profit will be amplified by the same multiple. For example, if the price of Coin A rises by 5%, the trader's leveraged position would yield a 50% profit, significantly more than without leverage.
However, the risks are equally magnified; if the market moves against the trader by a certain amount, they could face liquidation and lose their entire initial capital. In this scenario, it’s important to understand risk management.
Funding rate
Perpetual trades do not have an expiry period. Instead, they’re controlled by a concept known as “funding rate.”
A funding rate is a feature of the perpetual contracts market. It is a mechanism used to maintain the price between the underlying asset and the perp contract.
Funding rates are paid periodically by either side of a perp market, long and short traders, based on the market's direction to the price between the underlying asset and the perp contract.
Margin
The margin ensures that traders are liquid to open up a position in the perp market and maintain the opened position.
The initial margin is the capital used to open the position. On the other hand, the maintenance margin is the amount required asa balance to ensure that the trader’s position stays open.
Liquidation
A trader’s position is liquidated if the price of the asset falls below the trader’s margin. In a liquidation event, the market provider or perps trading platform closes the position (liquidating the trader).
Mechanisms such as stop-loss and price alerts help prevent full liquidation events and prevent the trader from losing their entire margin.
What are margin modes?
Perpetual (perps) trading offers different margin modes, such as cross-margin and isolated margin.
In cross-margin mode, a trader’s entire account balance can support the margin for a trade, helping reduce the risk of liquidation by using idle funds.
On the other hand, in isolated margin mode, only the specific margin allocated for that trade is at risk, meaning that losses are limited to the funds assigned to the position.
Where can I trade perps?
Perpetual trading markets are available on centralized exchanges like Binance, Bybit, and others.
On-chain perpetual markets are also offered by decentralized applications (dApps) such as Aevo, HyperLiquid, Drift, and GMX, which are gaining popularity in the DeFi space.
