CoinEx | Differences Between Conventional Futures Contracts and Perpetual Futures Contracts
Many beginners who have just joined the crypto industry find it difficult to distinguish regular futures (also known as delivery contracts) from perpetual futures. In addition, new investors are also frequently confused as to whether they should choose regular futures or perpetual futures. Today, we will tell you everything about the differences between the two.
First of all, conventional futures contracts are the trading object or underlying asset of futures trading. They are standardized contracts uniformly drafted by futures exchanges. Conventional futures contracts stipulate the delivery of physical or financial commodities in the specified amount and quality. For example, according to the rules of the Chicago Board of Trade, the trading unit of a wheat futures contract is 5,000 bushels. If a trader buys a wheat futures contract, he would get 5,000 bushels of wheat at the specified expiration date.
Perpetual futures contracts are a type of crypto derivatives that resemble conventional futures contracts. The market of perpetual futures is similar to a margined spot market, and the price of perpetual futures is pegged to the spot price of the underlying asset through the funding rate. Compared with conventional futures contracts, the most prominent feature of perpetual futures is that there is no delivery or settlement date, and traders can hold onto a position indefinitely.
Here is an example: suppose a trader started a position in the BTC/USDT linear contract market on a crypto exchange, he could hold onto the position forever unless it is liquidated or if he chooses to close the position manually. The trader is not restricted by any delivery date.
The primary differences between perpetual futures and conventional futures include:
1. Different underlying assets
The underlying asset of most conventional futures contracts is a physical commodity or a financial asset, such as soybeans, oil, stocks, and bonds. When trading perpetual futures contracts, the primary underlying asset is cryptocurrency. For instance, the underlying assets of linear contracts include BTC/USDT, ETH/USDT, etc.
2. Different trading hours
The trading hours of conventional futures contracts, determined by futures exchanges, are usually 9 hours a day, with delivery/settlement on a monthly, quarterly, or annual basis. Perpetual futures contracts, on the other hand, can be traded 24/7, and users can trade perpetual futures on a crypto exchange at any time. Plus, there is no delivery/settlement date for perpetual futures.
3. Different mechanisms
Conventional futures contracts often use the clawback mechanism, which means that all traders who have profited must pay the clawback fee to bear the bankruptcy loss when some traders failed to liquidate their position in time due to extreme price swings and their margin could not cover the losses. Perpetual futures contracts, on the other hand, often adopt a mechanism called Auto-deleveraging (ADL), which reduces the position of opponents to minimize market risks. It is noteworthy that CoinEx Futures introduced multiple mechanisms, covering the Insurance Fund and ADL, and the Insurance Fund makes sure that no clawback is required in the event of bankrupted positions.
4. The price of perpetual futures contracts is often closely bound up with the spot price
Unlike conventional futures contracts, which may deviate from the spot price of their underlying asset, perpetual contracts are usually closely tied with the price of the underlying asset they track. In other words, the price of perpetual futures contracts is closely bound up with the spot price.
As perpetual contracts are pegged to the spot price, they rarely suffer forced liquidation due to malicious market manipulation. Conventional futures contracts, however, are more vulnerable to such risks. Moreover, the price of conventional futures contracts is normally the same as the order book price of the exchange, which means that it is influenced by the “best bid price” and the “best ask price”.
It should be noted that CoinEx adopts a unique price mechanism called the Mark Price (determined by the futures price on mainstream exchanges) to minimize price discrepancies. Meanwhile, the exchange also uses the Funding Rate mechanism to make sure that the futures price stays roughly the same as the spot price.
That said, what kind of futures should beginners choose? We would advise beginners to start from perpetual futures contracts. Firstly, perpetual contracts have no expiration date, and users can hold onto their positions indefinitely. Secondly, traders of perpetual contracts can flexibly adjust the leverage ratio. For example, CoinEx Futures provides leverage of up to 100X, and users are free to adjust the ratio as they see fit after opening a position. While offering flexible risk protections, CoinEx also enables optimal trading experiences.