Futures vs Perpetuals

Comparision of derivative contract types

Futures Contract

A futures contract is a standardized legal agreement to buy or sell a specific commodity or financial instrument at a predetermined price on a specified future date. These contracts are traded on futures exchanges and are commonly used for hedging or speculative purposes. Buyers of futures contracts agree to purchase the asset at the contract's expiration, while sellers agree to deliver the asset.

Unlike options, both parties in a futures contract are obligated to fulfill the contract terms. These contracts help manage price risk by locking in prices in advance.

Margin collateral is either be denominated in underlying cryptocurrencies, allowing traders to speculate on the future value of its products using only crypto collateral, or they can be denominated in USDT/USDC.

Perpetual Contract

A perpetual contract is a type of derivative similar to a futures contract but with no expiration date. It allows traders to hold positions indefinitely without the need to roll over contracts. Perpetual contracts typically use a "funding rate" mechanism to keep the contract price close to the underlying asset's spot price. This funding rate is paid between long and short position holders at regular intervals.

If the Perpetual Contract trades at a higher price than the index, traders that have long positions need to make funding payments to the traders having short positions. This funding payment will make the product less attractive to the long-position holders and more attractive to the short-position holders. This dynamic attempts to drive the perpetual price to trade in line with the price of the index. If the Perpetual Contract trades at a price lower than the index, the short position holders will have to pay the long position holders.

Read more about "Funding": Bitmex Guide, Deribit Guide

Differences between Futures & Perpetual Contracts

The core differences between Perpetual and Futures can be summarized as follows:

Here are the core differences between futures and perpetual contracts in five main bullet points:

1. Expiration:

   • Futures Contracts: Have a specific expiration date.

   • Perpetual Contracts: Do not have an expiration date.

2. Position Management:

   • Futures Contracts: Require rolling over positions at expiration.

   • Perpetual Contracts: Positions can be held indefinitely without rolling over.

3. Price Alignment:

   • Futures Contracts: Price convergence occurs at the contract's expiration.

   • Perpetual Contracts: Use a funding rate mechanism to keep the contract price close to the spot price continuously.

4. Market Popularity:

   • Futures Contracts: Used across various asset classes, including commodities, currencies, and financial instruments.

   • Perpetual Contracts: Especially popular in cryptocurrency markets for their flexibility.

5. Obligations:

   • Futures Contracts: Both parties are obligated to fulfill the contract terms at expiration.

   • Perpetual Contracts: Continuous settlement through funding payments between long and short positions.