What are Perpetual Contracts?
Let's find out Perpetual Contracts meaning, definition in crypto, what are Perpetual Contracts, and all other detailed facts.
A perpetual contract is a type of derivative that is similar to futures contracts because it uses tokens as collateral to open a leveraged position but doesn’t have an expiration date. If you forecast that the price of that asset will rise, and it does, you receive more tokens than you put in when you close your trade. If it’s the opposite situation, you receive less than what you invested.
As mentioned before, expiration is the main distinction between futures and perpetual contracts. Futures contracts are resolved after a predetermined time period, but perpetual contracts have no expiration or settlement date, allowing you to keep a contract indefinitely.
As the expiry date approaches, the price of classic futures contracts increasingly converges with the spot market price of the underlying asset. Since they don't have an expiration date, perpetual contracts have a premium known as a funding payment, which is paid between traders to keep the price in line with the spot market.
When the contract price is higher than the spot price, traders holding long positions have to compensate traders holding short positions, and vice versa. These payments are made on regular intervals (typically 1 hour or 8 hours).
Perpetual contracts are the most traded cryptocurrency instrument thanks to their ease of use and versatility.