Crypto perpetual trading, or simply perps trading, is an innovative way to trade cryptocurrencies. It offers a number of advantages over traditional spot trading, including leverage, no expiry dates, and the ability to hedge against risk.
What are Crypto Perpetuals?
Perpetuals are a type of crypto derivative that allow traders to speculate on the future price of a cryptocurrency without having to take ownership of the underlying asset. They are similar to futures contracts, but they do not have an expiry date. This means that traders can hold their positions for as long as they want.
How do Crypto Perpetuals Work?
Perpetuals are traded on margin, meaning that traders only need to deposit a small percentage of the contract value to open a position. The remaining amount is borrowed from the exchange. This allows traders to leverage their positions and potentially make larger profits.
Perpetuals are also subject to a funding rate, which is a small fee that is paid by long or short traders, depending on the market conditions. The funding rate is designed to keep the perpetual price aligned with the spot price of the underlying asset.
Advantages of Crypto Perpetual Trading
There are a number of advantages to crypto perpetual trading, including:
- Leverage: Perpetuals allow traders to leverage their positions, which can amplify both profits and losses. However, it is important to use leverage carefully, as it can also lead to significant losses.
- No expiry dates: Perpetuals do not have an expiry date, meaning that traders can hold their positions for as long as they want. This provides flexibility and allows traders to capitalize on long-term trends.
- Hedging: Perpetuals can be used to hedge against risk in spot holdings. For example, if a trader is holding a significant amount of Bitcoin and anticipates a market downturn, they can open a short position in Bitcoin perpetuals to offset potential losses.
- Market liquidity: Perpetual markets are highly liquid, making it easy to enter and exit positions without significant price slippage.
Disadvantages of Crypto Perpetual Trading
There are also a few disadvantages to crypto perpetual trading, including:
- Risk: Perpetual trading is a risky activity, and traders can lose more money than they invest. It is important to understand the risks involved before starting to trade perpetuals.
- Funding rates: Funding rates can add to the cost of trading perpetuals, and they can also be difficult to predict.
- Complexity: Perpetual trading can be complex, and it is important to have a good understanding of the mechanics before starting to trade.
Getting Started with Crypto Perpetual Trading
If you are interested in getting started with crypto perpetual trading, here are a few things you need to do:
- Choose a reputable exchange: Select a cryptocurrency exchange that offers perpetual trading. Ensure it is a reputable platform with good security measures and liquidity.
- Create an account / Connect your wallet: Sign up for an account on the chosen exchange and complete the necessary KYC (Know Your Customer) verification. if it is a decentralized exchange like Polynomial Protocol a decentralized perpetual futures exchange that offers a seamless and intuitive user interface, the ability to trade perpetual contracts without compromising the security of customer assets, and low fees. You just have to connect your wallet on optimism network to https://trade.polynomial.fi/perps?market=sETHPERP
- Deposit funds: Deposit your chosen cryptocurrency or fiat into your exchange account. This will serve as your trading capital.
- Learn risk management: Educate yourself on risk management strategies. Consider using stop-loss and take-profit orders to protect your investments.
- Start small: Begin with a small position size and low leverage to get accustomed to the mechanics of perpetual trading.
- Practice: Some exchanges offer demo accounts for practice. Consider using these accounts to hone your trading skills before risking real capital.
Trading on CEX vs. DEX
Trading perpetual futures contracts on centralized exchanges (CEX) and decentralized exchanges (DEX) offers distinct experiences due to the structural differences between these platforms.
CEXs are governed by centralized authorities or registered entities, providing higher liquidity, faster transactions, and seamless conversion between cryptocurrencies and fiat currencies. They also typically offer customer support, a valuable resource for new traders. However, CEXs are attractive targets for hackers due to the accumulation of user funds. Additionally, they often require users to complete Know Your Customer (KYC) processes, which may not appeal to those seeking anonymity.
In contrast, DEXs operate without a central authority, relying on blockchain technology to facilitate direct peer-to-peer trades. DEXs offer enhanced privacy, often omitting KYC checks. Users have full control over their funds, reducing the risk of loss due to exchange hacks. A good example is Polynomial Protocol, the DeFi Derivatives Powerhouse, check out it’s website and Discord
Conclusion
Crypto perpetual trading offer traders an intriguing avenue to speculate on cryptocurrency price movements without the constraints of expiry dates. While they provide numerous advantages, such as flexibility and leverage, they also come with high risks, especially for those unfamiliar with leverage and margin trading. It is a powerful tool that can be used to generate profits and hedge against risk. However, it is important to understand the risks involved before starting to trade. Traders should also learn risk management strategies, gain experience in the crypto derivatives market before engaging in perpetual futures trading and also start small to minimize their losses.
