Perpetual Futures Contracts are one of the best crypto assets to help you manage both volatility and risk effectively, especially in the current market situations which are both dynamic and unpredictable.
Unlike its short-term counterpart, spot trading, perpetual futures needs a better understanding of the asset, market movements, and a clear strategy to reap sizeable benefits.
So if you are someone who is in it for bigger and more informed gains from your investments, do read on.
To understand this crypto asset, we need to understand what Futures are, first.
Futures are a part of the crypto derivative market. A derivative is a financial instrument whose value is derived from the current market price of the underlying asset. This underlying asset could be any asset, such as currencies, bonds, commodities, and stocks, among others.
Since the value is derived from the underlying asset, it gets the name derivative. With derivatives, you can manage risks and speculate. This is possible because of the uniqueness of the nature of futures contracts.
Futures allow two parties to enter into a contract to buy or sell a derivative sometime in the future, the terms of which are decided on the current day. The party to buy the derivative could specify a price they would pay for it on a future date, based on their speculations and understanding of risk at that moment. This agreement is sealed with a contract. Hence the term contract.
These derivatives are called perpetual given the absence of a set execution period. This is what marks the main difference between perpetual and regular futures: their maturity.
As pointed out earlier the maturity period marks the main difference between traditional and perpetual futures. There are few more features that differentiate the two.
Perpetual futures contracts are settled on an everyday basis. This means that any gains or losses are realized at the end of each day, rather than at the end of the contract period. This is especially helpful for traders who are looking to hedge their positions or take advantage of short-term price movements in the market.
Finally, perpetual futures contracts are typically traded on decentralized exchanges (DEX) like Eterna Exchange. This means that traders have more control over their funds and can trade with greater transparency and security. The kind of control that both seasoned and novice traders appreciate when working with crypto investments.
Note: Unlike its traditional counterpart, the crypto market is active 24*7, 365 days a year.
When trading perpetual futures contracts, traders can take either a long or short position.
A long position means buying the contract with the expectation that the price of the underlying asset will increase, which basically means the trader is bullish on the market and expects the price to rise in the future. If the price does indeed rise, the trader can sell the contract at a higher price and make a profit.
On the other hand, a short position means selling the contract with the expectation that the price of the underlying asset will decrease which means that the trader is bearish on the market and expects the price to fall in the future. If the price does indeed fall, the trader can buy back the contract at a lower price and make a profit.
So, the main difference between long and short positions is in how the trader/investor perceives market movement.
Traders who believe that the price of the underlying asset will rise take a long position, while traders who believe that the price will fall take a short position.
It’s important to note that both long and short positions come with their own pros and cons. Long positions have unlimited profit potential but also carry a limited downside risk, while short positions have limited profit potential but unlimited downside risk.
Therefore, you should carefully consider your market outlook, and risk tolerance, and weigh market sentiments before entering either a long or short position in perpetual futures contracts.
Liquidation refers to the process wherein a trader’s position is closed aka “liquidated” when their account balance falls below the required minimum margin level. Marking this level is necessary to ensure that the trader has sufficient funds to cover potential losses and to maintain the integrity of the perpetual futures market at any given point in time.
When a trader enters a position on a perpetual futures contract, they are required to put up a certain amount of fun as collateral. This collateral is referred to as the initial margin. The collateral is then used as a security to cover potential losses in the event market moves against the trade. If and when the price of the underlying asset moves against what the trader expected and the account balance falls below the required minimum margin level, the trader’s position can be liquidated.
Liquidation is a serious risk for traders, as it can lead them to lose their entire trading capital.
Here are some steps that you can take to minimize the risk of liquidation and keep your accounts safe:
By maintaining and monitoring your account balance, and margin levels and adjusting their positions or adding more collateral if necessary to maintain the required margin levels, you can bring down the probability of liquidation substantially.
Stop-loss orders are designed to automatically close a position when the underlying asset’s price reaches a certain level. Using these orders you can help limit potential losses and prevent your account from being liquidated. Eterna Perpetual Futures DEX offers a range of advanced order types, including stop-loss orders, to help traders manage their risk.
Leverage can amplify both profits and losses, so it’s crucial to choose the right amount of leverage for your trading strategy, based on your risk tolerance. You should only use the leverage that you can afford to lose and avoid overleveraging your positions.
Eterna Exchange offers up to 125x leverage on perpetual futures contracts, which allows traders substantial room to invest larger sums.
Diversify Your Portfolio
Finally, you can reduce your risk of liquidation by diversifying your portfolio across different assets. By spreading your risk across multiple positions, you can reduce their exposure to any single asset and minimize the impact of potential liquidation. Eterna offers over 250 pairs to trade in. Create a portfolio with a safety net so your account does not get liquidated.
Leverage refers to the act of using borrowed capital to trade in the market.
The ultimate goal for any trader is to make profits on their investments. The sentiments are the same be it crypto, forex, or stock trading. Investors and traders will always want to maximize their profits through speculation and opening positions that they believe will bring them more returns.
Higher the investments, the greater the risks, and the returns.
However, a trader might not always have enough liquid to invest in the asset they wish to. This might limit the amount of profit they realize on any trade. This is where leverage comes into play.
Leverage allows traders to substantially increase their buying or selling power by letting them trade in larger amounts. So, even if you happen to have only $100 in your wallet, you can end up opening positions 10x, 20x, and sometimes even 100x of that amount. This means even though you have just $100 with you, you could use this amount as collateral and open buying or selling positions of $1000, $2000, or even $10,000 respectively, thereby amplifying your potential profits.
For example, let’s say you want to buy 1 BTC, which is currently trading at $50,000. Without leverage, you must provide $50,000 upfront to buy 1 BTC. However, with a leverage of 10x, you can open a position of 10 BTC ($500,000) by putting up only $50,000 as collateral. This allows you to potentially make 10x the profit (or loss) as against a scenario where you would’ve invested $50,000 without a 10x leverage.
Now, let’s take a look at how leverage can help in perpetual futures trading specifically.
In perpetual futures trading, leverage allows traders to increase their exposure to the market without having to put up the full value of the contract at go. This can be especially useful in volatile markets, where small price movements can result in significant gains or losses.
For example, let’s use the earlier example where you used a 10x leverage along with $50,000 collateral to buy 10 BTC worth $500,000.
Now, let’s say that the price of BTC rises to $55,000. Without leverage, you would make a profit of only $5,000 (10% of $50,000). However, with 10x leverage, you stand to make a profit of $50,000 (10% of $500,000 or 10 x $5000). This is 10 times the profit that you would have made without leverage.
But you should also be aware of the downside of using leverage. It can also magnify losses, so you should use it responsibly and only trade with funds that you can afford to lose. Eterna Exchange offers up to 125x leverage on perpetual futures contracts, but you should always carefully consider their leverage level and risk management strategy before entering a trade.
Here are some tips on using leverage effectively in perpetual futures trading so you can maximize profits and manage risk.
Leverage can amplify both profits and losses, so it’s important to understand the risks involved before signing up for leverage in perpetual futures trading. You should only use the leverage that you can afford to lose and you should have a clear risk management strategy in place. Preferably a diversified portfolio to keep your trades safe from liquidation.
You should always avoid overleveraging any position. Overleveraging can amplify the risk of liquidation and potentially wipe out your entire trading capita if not monitored and managed on time. It’s recommended that you use leverage levels that are appropriate for your risk appetite and trading goals. So while starting out, start with smaller leverages and gradually increase the level as you become more market ready, knowledgeable, and have a higher risk tolerance than when you had started trading.
Choosing the right leverage level is critical for successful perpetual futures trading. Always consider your risk tolerance, trading goals, and market conditions when choosing a leverage level. Lower levels of leverage might be right for traders who are new to perpetual futures trading or who have a lower level of risk tolerance, while a higher level may be recommendable for experienced traders who have higher risk tolerance.
Stop-loss orders, as mentioned earlier, are an essential risk management tool that can help you minimize losses and prevent your account from being liquidated. You can set stop-loss orders at a specific price level to automatically close your positions if the market moves against your trade. This can help you limit your potential losses and manage market risks effectively.
Always monitor margin levels closely to ensure that you have sufficient funds to cover potential losses. Margin levels can change rapidly in volatile markets, which is especially true for crypto. So be prepared to adjust your positions or add more collateral if necessary.
Perpetual Futures contracts in crypto are a valuable asset if you’re looking to manage risks and speculate effectively in the volatile crypto market. Unlike traditional futures contracts, perpetual futures contracts have no set maturity period and are settled on an everyday basis. You can take either a long or short position depending on your market outlook, risk tolerance, and market sentiments.
However, perpetual futures trading comes with its own set of risks, including liquidation, in which a trader’s position is closed if their account balance happens to fall below the required minimum margin level. You can minimize the risk of liquidation by maintaining adequate margin levels, using stop-loss orders, choosing the right leverage level, and diversifying your portfolio.
Leverage can amplify both profits and losses, and traders should use it responsibly and only trade with funds that they can afford to lose. To use leverage effectively in perpetual futures trading, traders should understand the risks involved, use leverage responsibly, choose the right leverage level, set stop-loss orders, and monitor margin levels closely.
At Eterna Exchange, we offer up to 125x leverage on perpetual futures contracts, real-time margin monitoring and alerts, and a range of advanced order types to help traders manage their risks and maximize their profits. With around 200 trading pairs to choose from, Eterna Exchange is a trusted DEX and market leader in perpetual futures trading. Start trading with us and experience the benefits of perpetual futures contracts in crypto. Sign up for the waitlist to be one of the first ones to start trading on the Eterna Exchange.
** Please note that the prices used for cryptocurrency are just for example sake and do not reflect actual market prices.