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Perpetual Swaps for Bitcoin – Explained!

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Introduction

Perpetual Swaps, also referred to as perpetual contracts, are essentially a very popular type of futures contract. These contracts are largely dominated by the BitMEX exchange. The XBT/USD has seen to be one of the most popular products offered by them. Bitcoin derivatives, particularly perpetual contracts on BitMEX, were surging of popularity in 2009, in every Bitcoin derivative platform where all of them had record high volumes.

According to sources, BitMEX has a volume of around $2 billion consistently for 24-hour for Bitcoin futures. One of the reasons for this overwhelming volume can be accounted for its high leverage that is provided. For example, BitMEX facilitates 100x leverage on perpetual contracts. So, traders can open positions worth 100 BTC in the futures market with just 1 BTC as margin.

 

Understanding Futures Contracts on Bitcoin

Perpetual swaps can be considered as a futures contract for Bitcoin where a futures contract is simply an agreement between two parties to buy/sell a security at a particular price and date in the future. The buyer of the futures contract is then required to buy the underlying asset once the contract comes to expiry, and the seller is obligated to deliver those assets to the buyer at the time of expiry.

Futures are said to be a type of derivatives because they are derived from the underlying value of the asset. But perpetual contracts are quite different though they are a form of futures contracts. They are also referred to as “inverse futures contracts.” It is nothing but a standard futures contract, where cash-settlement of the underlying asset can be done without physical delivery.

The reason they are referred to as inverse futures contracts for Bitcoin because the settlement for BTC/USD is accomplished in BTC instead of USD that happens in all other futures markets. As a result, the US dollar is interpreted as a commodity, while BTC is used for the settlement of the contract.

The Benefits of Trading Perpetual Swaps

Well, there got to be some reasons for the skyrocketing volume that is seen in the volume of Bitcoin futures contracts. So, let’s discuss them out.

1️⃣ The uniqueness of the inverse futures contract is that it enables us to trade cryptocurrencies against fiat currencies without really having any exposure to the fiat currency. This type of facility can cut through the regulatory complications involving deposits into the exchange using fiat currencies.

2️⃣ Practically hedging positions in USD by shorting positions is another great exclusive feature in an inverse futures contract for Bitcoin.

3️⃣ As mentioned, every future comes to an expiry. However, the inverse futures contract created by BitMEX does not expire and levy a funding rate at three predetermined times every single day using the negative funding mechanism. The funding payment (size of the position plus the funding rate) is provoked every 8 hours at these specific times: 4:00 UTC, 12:00 UTC, 20:00 UTC.

Conclusion

With the great features offered by the inverse futures contract for Bitcoin, the possibility of institutional money coming into the cryptocurrency market seems to be pretty high, which could hence expand and mature the existing futures market. Also, the no expiration of Bitcoin futures is another for this market to stay tight in the coming years as well.

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