Perpetual contract is an excellent alternative to trade cryptocurrencies. Gate.io is one of the crypto exchanges providing the feature and here's how you use it.
These days, there are loads of different approaches available in terms of how to trade cryptocurrencies. Each option surely has some unique pros and cons, so it's highly important to learn about the subject before you start trading. It's also necessary to understand the associated risks as well as the rules that might apply to them. Then, you can make your choice based on your needs and jurisdictions.
One of the more innovative solutions to trade crypto is by using perpetual contracts. In the crypto world, the use of perpetual contracts has increased quite drastically in the last few years due to high flexibility, liquidity, and ease of use. In this article, we're going to learn how to trade crypto with perpetual contracts, particularly on Gate.io.
What Is Perpetual Contract?
Perpetual contract refers to a derivative that allows traders to speculate on an asset's price movements without having to actually hold the asset itself. Traders only need to focus on the ups and downs of price movements, making it a very easy instrument to use.
Perpetual contracts are basically very similar to futures which enable traders to buy or sell an asset at a predetermined time for a specific price. For example, a futures contract specifies that 1 BTC can be sold for $100,000 on January 11th, 2022. This means the contract can be traded before the expiration date, allowing traders to open a position based on their speculation of the future price of BTC.
However, unlike futures contracts, perpetual contracts don't have any expiration date or settlement, so they can be held or traded for an indefinite amount of time. It also provides higher leverage than traditional futures. This makes perpetual contracts increasingly popular among crypto traders as they can hold leveraged positions without having to bear the burden of an expiration date.
It is worth noting that perpetual contracts trade close to the index price of the underlying asset based on perpetual funding rates, which is the primary mechanism that provides stability to perpetual contracts. It basically incentivizes traders to buy the contracts when the price is low relative to the index and encourages them to sell when the price is high. While the concept sounds simple, such a mechanism needs to be well-designed to work. Otherwise, the market will be more vulnerable to price deviation, which in turn might increase trading risks.
Trading with Perpetual Contracts on Gate.io
Gate.io is a well-known crypto exchange that offers a wide variety of tradable assets and trading instruments, including perpetual contracts. By using perpetual contracts in Gate.io, users can get up to 100x leverage and higher flexibility compared to regular spot trading.
How to Open a Position
Before you can open a position, you'll need to transfer your funds to a special contract account. It is specifically dedicated to contract trading so you can only use the funds from this special account as margin. Here's how the process goes:
- Log in to your Gate.io account and choose "Transfer" in "Wallet".
- Select "Perpetual Futures Account" and input the amount of BTC or USDT that you'd like to transfer.Click "Confirm" once you're done.
- Head over to "Trading" at the top of the page and click "Perpetual Contracts".
- Read the risk warning and confirm.
Now, when it comes to opening a position, there are three ways that you can choose:
A. Limit Order
- Choose "Limit Order" in the operation area to make an order.
- Click "Buy Long" or "Sell Short" and confirm once you're done.
- Review the details of your order and complete the transaction.
B. Market Order
- Choose "Market Order" to make an order.
- Input the number of contracts and adjust the leverage ratio. No need to input the price.
- The rest of the steps are the same as trading with the limit order.
C. Stop Order
Once the price reaches a certain predetermined level, the order will be automatically submitted depending on the price, number, and trading types.
Some Possible Scenarios
In order to understand how perpetual contracts work, let's take a look at some possible scenarios when trading with perpetual contracts in comparison with spot trading. Keep in mind that in the following examples, we assume that the spot and contract prices are the same and don't consider the commissions and funding fees.
Going Long with Perpetual Contracts
Going long essentially means you buy the asset at a low price and sell out at a high price. You need to lock some funds as margin and borrow money as leverage. When the price of the currency rises to a certain level, you can sell the asset and return the leverage back to the exchange. You can keep the rest of the money.
Let's say that the current price of BTC is 5,000 USD. If you buy 1 BTC in the spot market and the price rises to 5,500 USD, you'll get a 10% rate of return. However, if you use 1 BTC as margin to buy 500,000 perpetual contracts (equivalent to 100 BTC) with 100x leverage and the price rises to the same level, you'll get a 1,000% rate of return.
Going Short with Perpetual Contracts
Going short essentially means that you sell the asset at a high price and buy out at a low price. With leverage, you basically borrow some funds from the exchange and sell it will less money as margin. When the price of the currency drops to a certain level, you can then repurchase the asset and return the leverage back to the exchange. You can keep the rest as profit.
Let's say the price of BTC is 5,000 USD and you expect it to drop soon. If you sell your 1 BTC to stop loss and the price really does drop to 4,500 USD, then you'll protect yourself from a 10% loss. However, if you use your BTC to go short with 500,000 contracts and the price really drops, you'll gain a 1,000% rate of return instead.
In both long and short positions, you can make the wrong speculation and this will amplify your loss significantly. This is a risk that you should consider when trading with perpetual contracts.
Say the current price of BTC is 5,000 USD and you expect the price to rise. If you decide to buy 1 BTC in the spot market but the price drops to $4,990 instead, you'll lose 0.2%. Now if you decide to use 1 BTC as margin to go long on 500,000 perpetual contracts (equivalent to 100 BTC) with 100x leverage in this scenario, then you'll lose 20%.
Also, keep in mind that in order to keep your position, you should hold a certain percentage of the position value on your contract account. This is known as the maintenance margin. If you can't fulfill the requirement, you will be liquidated and your margin will be gone.
The Bottom Line
Based on the explanation above, we can see that perpetual contracts can be a great alternative to trading cryptocurrencies. The biggest benefit is that perpetual contracts can be held or traded continuously. You don't need to worry about any approaching expiration date, so they are more flexible and active than single future contracts in the crypto market.
Also, perpetual contracts can be used to amplify your potential gains as long as your speculation is correct. However, if you make a wrong prediction and the price moves in the opposite direction, you could suffer more damage than regular spot trading.
At the end of the day, it's important to know that perpetual contracts are not free of risk, so you need to fully understand how they work before using them.
Gate.io is known to provide clients with various ways to earn income from cryptocurrency. Aside from perpetual contracts, there's also something called Gate.io's Magic Box that's worth exploring.