What are Bitcoin Perpetual Swaps and How to Trade Them

01 Apr 2020

Bitcoin in front of a chart

In your cryptocurrency trading journey, you will find there are various types of financial products out there that go well beyond just buying and selling a cryptocurrency for a profit. Among them are the perpetual swaps, a type of derivative – a futures contract – that doesn’t have an expiry date.

First things first, however, let’s look into what are derivatives and how they differ from spot trading.

What Are Derivatives?

From a top-level, it is a general term to describe any financial product whose value is based on the value of another, underlying asset; in this sense, the derivative is derived from a primary asset.

This is quite a broad classification, and many types of financial products can be built atop this mechanic. On some exchanges, derivatives take the form of futures and “perpetual swap” contracts derived from the current valuation of a number of crypto assets.

Both of these new crypto-financial products are leveraged, meaning you can trade them with “margin”. Investopedia defines margin as “money borrowed from a brokerage firm to purchase an investment”, and the point of borrowing money in this way is to be able to trade larger positions than you can actually afford to – a credit card for trading, if you like. But like with credit cards, you risk a significant penalty if you bungle things.

One of the major advantages of leveraged trading is the ability to “short”, or invest in the value of an asset falling. The upshot of this is that, even if prices are falling, profit can still be made. This is most easily thought of, and indeed is, essentially an insurance contract.

What are Perpetual Swaps?

Moving on to perpetual swaps, as mentioned above, these are a type of derivative with no expiry date. When traders open a perpetual swap trade they essentially bet on whether the value of an asset will rise or fall and may have to pay funding fees.

Just like with other derivatives, traders can choose one of two directions: they can open a long position if they believe the value of the asset is going to increase, or open a short position if they believe the value of the asset is going to decrease.

The funding fees are a mechanism that ensures convergence of the perpetual price to the spot price by an exchange of currency swaps between traders in long and short positions. More often than not, the funding fees are paid every eight hours.

If the funding rate is positive, then long positions will pay and short positions will receive the funding, and vice versa if the rate is negative.(Only users who hold positions at the funding timestamps will receive or pay funding; if the position has been closed before settlement, users won’t receive or pay funding.)

This system incentivizes users to open positions in a way that ensures the perpetual swap’s price follows the market price of its underlying asset.

Where to Trade Perpetual Swaps

Various cryptocurrency trading platforms now let users trade perpetual swaps, but there are a few things to keep in mind before choosing one to go with. It’s important to go with a reliable platform that has a history of excelling at security, liquidity, and performance.

An easy-to-use interface and a proper user experience are also worth considering. Some platforms even offer users risk management mechanisms that help prevent liquidations. Here it’s worth pointing out overleveraged positions are believed to have been behind some of the crypto market’s most aggressive sell-offs.

A platform to consider is Huobi DM (Huobi Futures), the digital asset derivative trading platform under Huobi Group. It was officially launched on December 10, 2018 with the aim of providing the most secure, professional and efficient crypto derivatives service.

It provides global users with advanced crypto instruments to offset risk in the spot market and offers various investment opportunities as well as the strongest risk control & security. It has become one of the leading crypto derivatives platforms in terms of user numbers, daily volume, market depth. The Huobi Group has six years of digital asset trading experience. Huobi’s exchange, by the end of 2019, had a cumulative turnover of over $3 trillion.

The Huobi Group is present all over the world and complies with regulators, being licensed in Japan, Thailand, Gibraltar, Korea, Turkey, Indonesia, and Argentina. To the user, all of this means there’s reduced risk when dealing with the exchange.

Huobi offers weekly, bi-weekly, and quarterly futures contracts. When it comes to perpetual swaps, Huobi allows users to leverage their positions from 1x to 20x, 25x, 50x, and up to 125X and low trading fees for opening and closing contracts, as well as programs benefiting market makers.

The risk is further reduced by Huobi’s risk management mechanisms, which include partial liquidation with zero liquidation fees, liquidation circuit breakers to protect against abnormal liquidation losses, and various investor protection funds.

Partial Liquidation, it’s worth noting, is Huobi’s response to the problems overleveraged positions can have on the market. Explained in detail on blog posts, it establishes a tier system of liquidation parameters based on position sizes. Essentially, the different conditions for different chunks of a large position act as a series of firewalls, only liquidating pieces of a position so that (hopefully) a chain reaction is stopped.

These funds include a 20,000 BTC security fund, an insurance fund of $500,000 for each currency before it’s actively being traded, and a $200 million wager to cover potential claw back losses. It also supports various advanced order types and has a support team always available to help.

How to Trade Perpetual Swaps

To access the new Huobi Derivatives and trade perpetual swaps, a user must sign up with Huobi Global (HG). HG is the universal portal to access Huobi trading, and has several separately registered entities around the world in order to comply with local laws.

Signing up with HG will also give the user access to the dozens of trading pairs offered on Huobi’s spot trading platform, which is a more classical cryptoasset exchange: buy x of crypto A for y of crypto B.

Signing up will give the user access to nine cryptoasset pairs that can be margin-traded on the platform, and Huobi’s BTC perpetual swaps. More perpetual swaps trading pairs will soon be available as well. On April 3, the exchange is launching a perpetual swap for ETH.  On Huobi DM’s (Huobi Futures’) actual trading interface, the user has a full panoply of pro-grade trading options.

There is a proprietary, TradingView-esque charting window, as well as an actual TradingView implementation. A full order book visualization is present as well, as we would expect.

 All the pro-grade order types are also available: limit and conditional orders, with post-only, immediate-or-cancel, and fill-or-kill options.

On the cryptocurrency trading platform there’s a “Swap” button. Clicking there will take you to Huobi’s perpetual swap contract trading interface. Below the chart there’s a menu allowing users to open or close perpetual swap positions.

To enter a position all users have to do is determine whether they want to open a long or short one, the price they want to enter their position at, and the leverage they’re applying to it. For more complex orders, triggers may have to be defined.

It’s worth noting that Huobi DM’s (Huobi Futures’) connection to Huobi Global means limitless opportunities for sending capital from place to place, and taking advantage of whatever opportunities come up in the market; whether it’s spot trading crypto to cash, crypto to crypto, or resorting to margin trading in low-volatility periods (probably the best use of it).

Featured image by André François McKenzie on Unsplash.

Important information: Please remember that the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. If you are unsure of the suitability of your investment please seek advice.


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