Differences Between a Perpetual Contract and a Traditional Futures Contract

In crypto trading, contracts play a pivotal role in shaping the landscape. Two prominent contenders in this arena are the crypto perpetual contract and the traditional futures contract.

These financial instruments govern how traders speculate on the price movements of various assets, from cryptocurrencies to commodities. In this article, we dive deep into the intricacies of both perpetual contracts and traditional futures contracts, highlighting their differences and shedding light on their applications in the modern trading ecosystem.

What is a crypto perpetual contract?

A crypto perpetual contract is a derivative financial instrument that enables traders to speculate on the price movements of an underlying asset, such as Bitcoin or Ethereum, without owning the asset itself.

Unlike traditional futures contracts, perpetual contracts do not have a fixed expiration date. They are designed to closely track the market price of the underlying asset, providing traders with the flexibility to enter and exit positions at their convenience.

What is a traditional futures contract?

A traditional futures contract is a standardised agreement between two parties to buy or sell an asset at a predetermined price on a specified future date. These contracts are commonly used to hedge against price fluctuations or speculate on the future value of assets like commodities, currencies, and now even cryptocurrencies.

One distinguishing feature of traditional futures contracts is their fixed expiration date, which means traders must adhere to the contract’s terms within a defined time frame.

What are the differences between a perpetual contract and a traditional futures contract?

Here’s where the distinctions between perpetual contracts and traditional futures contracts come to the forefront:

Perpetual Contracts: Flexibility and Continuous Trading

No Expiry: Unlike traditional futures contracts, perpetual contracts do not have an expiration date. Traders can hold their positions for as long as they desire, giving them the flexibility to react to market trends.

Funding Rate: Perpetual contracts incorporate a funding rate mechanism, ensuring the contract’s price closely mirrors the spot market price. This mechanism prevents significant deviations between contract and spot prices.

Traditional Futures Contracts: Fixed Expiry and Clearing

Fixed Expiry: Traditional futures contracts have a fixed expiration date, which means traders must either settle their contracts or roll them over before the expiry.

Clearing House: Traditional futures contracts often involve a clearing house that acts as an intermediary, mitigating counterparty risk and ensuring contract settlement.

Let’s consider an example to illustrate the differences:

Perpetual Contract: A trader enters a perpetual contract to speculate on the rise in Bitcoin’s price. They can hold the contract indefinitely until they decide to exit. The contract price closely tracks Bitcoin’s market value.

Traditional Futures Contract: Another trader opts for a traditional futures contract to speculate on Bitcoin’s price. The contract has a fixed expiry date. They must sell or settle the contract before its expiration.

Conclusion

Both perpetual contracts and traditional futures contracts offer unique advantages and applications. Perpetual contracts bring flexibility and continuous trading, while traditional futures contracts provide fixed expiry and established clearing mechanisms.

When you engage in crypto trading, consider exploring platforms like ByTrade, where you can delve into the intricacies of perpetual contracts on popular pairs like BTC/USDT and ETH/USDT.