A perpetual contract or perp is an innovative trading tool that allows traders to capitalize on their market predictions without needing to own the actual asset. Here's how it simplifies:
The Duel of Perspectives
Fig 1: Bear means down. Bull means up.
Bullish Traders (Long Positions)
They predict an asset's price will increase.
They "buy" the contract, hoping to sell it later at a higher price for a profit.
Bearish Traders (Short Positions)
They anticipate the price will decrease.
They "sell" the asset they don't own, planning to buy it back later at a reduced price to profit from the price drop.
How Perps Work
Fig 2: Order Book. It matches sell and buy orders.
The perpetual contract serves as the mediator for these trades:
It maintains an order book where all Long and Short positions are recorded.
Open Interest reflects the total value of all open contracts, showing how much speculation is currently active.
Here’s the process:
When a trader takes a Long position, they're essentially matched with someone who has taken a Short position.
The exchange facilitates this match, keeping track of who needs to buy and who needs to sell.
Let’s See It in Action: Bitcoin (BTC) Example
Suppose:
Scenario 1:
Scenario 2:
The Bottom Line
Perpetual contracts are essentially a financial ledger for market speculation:
They allow traders to express their market views without owning the asset.
The exchange manages the transactions, ensuring that every Long is matched with a Short, simplifying the trading process.
This system allows traders to benefit from both rising and falling markets, making perps a versatile tool in your trading arsenal.
Next, we'll explore how to manage risks and leverage these insights for better trading decisions.
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