On March 27, Huobi DM announced it entered into the realm of Perpetual Swaps through its well-established Huobi Derivative Market (DM). Derivative trading has become a popular and lucrative way in the cryptocurrency space, and Perpetual Swaps, as a kind of derivative product, is another way for traders to arbitrage better positions.
To understand Perpetual Swaps, it is firstly important to understand futures trading. Essentially, Perpetual Swaps are a form of futures contracts but there is no expiry date on these contracts.
We will delve deeper into how futures trading works below, and we will get into the nuts and bolts of Perpetual Swaps, but we at Huobi would also like to explain why we have launched this product at such a time.
Better Hedge and Arbitrage Opportunities in Volatility
While Bitcoin market space has shown a higher degree of maturity, since the days of its all-time high at the end of December 2017, it recently reminded the community it is still extremely volatile. The price of the coin has managed to drop half its value and recoup almost all of that in a single week in March.
To help understand Perpetual Swaps a little better, we ‘d like to explain why these contracts are a powerful tool in times of high volatility — especially with the mature risk management system that Huobi has in place, such as partial liquidation, liquidation circuit breakers and so on.
In these volatile market conditions, there are risks and opportunities. In allowing our users to hold their positions perpetually (with perpetual swaps), and also more robust hedges in short positions under such bearish conditions in recent times. Arbitrage opportunities also show up in times of volatility, and Perpetual Swaps contracts allow traders to take better advantages there, too.
So, what is a Perpetual Swap Contract?
Perpetual Swaps fall under the umbrella of futures contracts, which in essence, perpetual swaps are never-expired futures contracts. Similar to futures contracts, perpetual swaps are standardized contracts that allow traders to long a position to profit potentially from the increase of a digital asset’s price, or short a position to profit potentially from the decline of a digital asset’s price. However, there are some uniqueness in perpetual swaps.
- No delivery and therefore no expiry date
- Funding mechanism
- Settlement in every 8 hours
Inverse Perpetual Swaps Contracts
There exist perpetual swaps already in crypto derivatives market. But what really makes Huobi’s Perpetual Swaps different at this launch is that they are a unique form of contract called inverse contract. Inverse perpetual contracts are also called coin-margined perpetual swaps which are quoted in USD but margined &settled in the given cryptocurrency.
Taking BTC perpetual contract (BTC/USD) as an example, where investors are exchanging BTC and USD asset flow. Instead of directly being margined and calculated Profits/Losses in USD, Huobi BTC perpetual swaps are margined and settled in BTC but quoted in USD in the market.
The benefit here is obvious that traders never have to be exposed to fiat in their contracts in that they put up BTC as their margin and are paid out in BTC at the new market price once the contracts are settled.
This is fairly similar to the inverse futures contracts, but what makes Perpetual Swaps ‘perpetual’ is that they do not have a set expiry date. Traders do not always appreciate having a set time limit on their contracts (often weekly, bi-weekly and quarterly contracts on Huobi) as such long periods may bring more risks as well.
With a Perpetual Swap, the contract can go as long as the trader wants provided there is no liquidations triggered. In other words, they can time their contracts for more investing opportunities and at the same time save their time from rolling over the contracts regularly thanks to no expiration.
Besides, the perpetual swaps can offer greater flexibility of fund. Your profits and losses are realized and settled three times a day, allowing you to leave the game and allocate your fund for other uses almost any time you desire.
Flexible leverage from 1x to 125x is also a plus on Huobi’s BTC perpetual swaps.
To trade perpetual swaps, users have to bear some costs which include trading fees (opening fees and closing fees). Besides, funding, as one part of users’ costs, is required as well. Funding is a special fee which is paid periodically only between the long and short users rather than a fee charged by an exchange. The long would pay the short if the funding rate is positive and vice versa. （Only users who hold positions at the funding timestamps will receive or pay funding; if the position has been closed before settlement, users won’t receive or pay funding.)
As mentioned above, funding mechanism sets perpetual swaps apart, which can encourage the price of perpetual swaps to stay close to its underlying spot index prices. This is a unique in crypto field that makes the perpetual swaps so complex while still widely-accepted. There is a formula to calculate funding on Huobi:
Funding = Net Position * Contract Face Value / Settlement Price * Funding Rate
This model pays out those who decide to go against the trends — short vs. long — and mimics interest payments between long and short positions on spot margin trading. Because of this, the perpetual swaps traders have an incentive to open or close certain positions to hone in the contract price on the index price using interest payments transferred between the long and short traders.
Digital assets are innovative investment products and their prices fluctuate greatly. This is not an invitation or an offer to buy or sell digital assets, nor is it a recommendation to buy or sell specific types of digital assets. Trading crypto currencies carries a high level of risk that may not be suitable for some people. Please rationally judge your investment ability and make decisions prudently.