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What are Perpetual Swaps

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2022-07-08
What are Perpetual Swaps

In an earlier article, we covered the inner workings of Future derivatives, and talked about the fact that futures in their traditional sense might not be so useful to cryptocurrencies. However, as with many things crypto revolutionized many things when it comes to financial markets.

In this article we will expand on the subject and cover another form of derivatives, which are Perpetual and Inverse perpetual swaps.

A perpetual swap is somewhat similar to a futures contract in that it allows traders to speculate on the future price movements of cryptocurrencies. The core difference is that, unlike a typical futures contract, perpetual swaps do not have expiration dates. In essence, this eliminates the need to constantly re-establish a long or short position after its settlement date is reached. For this reason, the price of perpetual contracts must be anchored to the spo t prices of their underlying assets. In the case of futures, there is no need for maintaining a price peg since the value of the contract and the underlying asset automatically converge as the expiration date nears.

Due to the absence of expiration dates in perpetual swaps, exchanges have anchored the price in a system called the funding rate mechanism This mechanism balances the short and long positions of perpetual swaps by either incentivizing or disincentivizing trades. Read more about how funding works in our Bitget academy here:

Perpetual futures were first proposed by economist Robert Shiller in 1992, to enable derivatives markets for illiquid assets. However, perpetual futures markets have only developed for cryptocurrencies, following their introduction in 2016 by BitMEX, and have since then become the norm in trading futures in the crypto industry.

Inverse Perpetuals:

In crypto the base currency is USD or USDT, as that ultimately reflects a real-world price that people can relate to. This means that on every trade assets are being converted back to USDT upon settlement of the trade at any given time. In one way this goes against crypto beliefs as ultimately the philosophical idea behind crypto is that ultimately it should become a stand-alone currency, available to anyone, everywhere at any time. Inverse perpetuals follow this train of thought as it uses crypto assets as their base currency, which allows traders to use their crypto for trading without having to convert it into a stable-coin at first, making cryptocurrency truly revolutionary. But that is not all, as Bitget even goes a step beyond with its Coin- M futures product.

Inverse perpetuals on Bitget:

Bitget even goes a step further, by introducing a derivative product based on inverse contracts, where the collateral is shared between all crypto assets combined with the revolutionary Coin-M futures. Read more here!

The future is bright, and this shows that crypto has already revolutionized that what traditional finance failed to achieve.

Disclaimer:

The information provided above is not financial advice but for educational and entertainment purposes. Please do your own due diligence or consult a financial advisor before investing in any digital assets.

All opinions expressed on Bitget’s Soapbox (also known as the ‘Soapbox’) are opinions of individual traders using the Bitget platform, and do not reflect the opinions of Bitget or its affiliate companies and partners. The Soapbox author’s opinions are based upon information they confirm to be reliable, but neither Bitget nor its affiliates warrant its complete accuracy, and it should not be relied upon as such.

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