A perpetual swap has grown in popularity among cryptocurrency traders over the past few years as a form of derivative trading product. Let's take a closer look.
What Is a Perpetual Swap?
A perpetual swap, which enables investors to buy and sell the value of bitcoin without actually owning any of it, is a way of trading bitcoin that is becoming more and more well-liked. Perpetual swaps do not expire, do not have a settlement date, do not require any trading of the underlying asset, and are easy to short.
Due to the funding rate mechanism, which balances the demand between buyers and sellers of the perpetual swaps so that the price of the swap aligns with that of the underlying asset, the perpetual swaps closely track the price of the underlying asset.
How Does It Work?
Let's use bitcoin as an example. By purchasing two BTC/USD perpetual swap contracts and putting down $40,000 as collateral, a trader can go long bitcoin using perps. Hence, the value of each BTC/USD perpetual swap contract is $20,000ld. The trader would have made $10,000 on each perpetual swap if Bitcoin's price reached $30,000 and they decided to close the position. The trader will have earned a $20,000 profit in total.
It's important to note that the aforementioned breakdown ignores the effects of the funding rate, which would determine the exact profit the trader makes.
Moreover, no leverage was used in this example. In the event that leverage had been used, the trade's profit would have increased because it would have been multiplied by the amount of leverage used.
In addition, a perpetual swaps contract can be settled with a simple cash exchange or the 'physical' delivery of the underlying asset.
What Is a Perpetual Swap? How Does It Work? - Hopefully, this article can help you to get some knowledge.
