What are Crypto Perps? A Beginner's Guide- 2024

Trading

Introduction

Craving exposure to the volatile world of crypto without actually owning the assets? Enter the realm of Crypto Perps, powerful financial instruments igniting a revolución in digital asset trading.

This comprehensive guide dives deep into the world of Crypto Perps, unraveling their intricacies and the opportunities they offer.

What are Crypto Perps?

First things first. What are Crypto Perps?

Imagine contracts allowing you to speculate on the future price of any cryptocurrency, without actually buying or selling it. That's the essence of Crypto Perps. These perpetual contracts track the underlying asset's price, enabling you to:

  • Go long: Bet on the price rising and profit if it does.
  • Go short: Anticipate a price drop and benefit from its decline.
  • Leverage your positions: Amplify your potential gains (or losses) by borrowing capital.
  • Craft flexible strategies: Design sophisticated trading plans tailored to market movements.

How do Crypto Perps Work?

1. Funding Rate: The funding rate is a periodic payment exchanged between long and short positions in a perpetual contract.

Long positions pay a funding rate to short positions when the contract price deviates significantly from the underlying asset's price.

2. Margin: Margin is the collateral required to open and maintain a perpetual contract position.

  • It acts as a security deposit, protecting the exchange from potential losses in case the position moves against the trader.
  • The margin requirement varies depending on the underlying asset, leverage used, and exchange policies.
  • Insufficient margin triggers liquidation, and automatic closure of the position to minimize losses for both the trader and the exchange.

3. Mark Price: The mark price is an oracle-derived reference point used for various calculations in perpetual contract trading.

  • It serves as a neutral and objective measure of the underlying asset's price, independent of trading activity on the exchange.
  • The mark price is used to determine funding rates, liquidation triggers, and potential profit/loss calculations.
  • Maintaining a reliable and unbiased mark price is crucial for ensuring fair and efficient trading on the perpetual contract market.

Let’s understand with an analogy. 

Imagine you're at a party betting on coin flips:

Heads & Tails: Instead of real coins, you're betting on the price of Bitcoin (or other crypto) going up (Heads) or down (Tails). These bets are called "positions."

Borrowing Chips: To make bigger bets, you can borrow "chips" from the party host (the exchange). This is called "margin." But remember, the more chips you borrow, the faster you can lose them all if your bet goes wrong!

Fair Play: To keep things even, every hour, the party host checks if the betting on Heads and Tails is balanced. If one side has gotten too greedy, they have to pay chips to the other side to balance things out. This is called the "funding rate."

Apart from these factors, there are plenty of other things that are involved in understanding how crypto perps work, but that’s a little more complex and requires an article of its own. For now, as a beginner, this is more than enough to test the waters in crypto perps. 

If you’re unsure of how to get started with perp trading, please refer to our guide here

Benefits of Crypto Perps

Crypto Perps offer a distinct advantage over traditional spot trading:

  • Increased flexibility: Shorting becomes readily available, opening up hedging and profit-taking opportunities in falling markets.
  • Enhanced capital efficiency: Utilize leverage to control larger positions with relatively little initial capital.
  • Uninterrupted trading: Unlike futures contracts with expiry dates, Perps remain open indefinitely, enabling continuous market exposure.
  • Granular opportunities: Trade on a wide range of cryptocurrencies, from established giants to emerging coins.

Crypto Perps Strategies

Once you grasp the basics, you can explore sophisticated strategies. Some of the strategies include:

  • Arbitrage: Exploit price discrepancies across different exchanges for risk-free profits.
  • Hedging: Protect your existing crypto holdings by taking opposing positions in Perps.
  • Mean reversion: Capitalize on temporary price deviations from underlying trends.

Conclusion

Crypto Perps offer exciting opportunities for both seasoned traders and curious newcomers. However, they come with inherent risks. By understanding their mechanics, implementing sound strategies, and choosing the right platform, you can navigate the dynamic world of Crypto Perps with confidence and potentially unlock significant gains.

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