Perpetual swap contracts (or perpetual swaps for short) have rapidly become one of the most popular ways to trade tokens. They offer traders a way to take large positions with little money and earn big profits even with small price movements.
Nevertheless, many don’t take the risks associated with perpetual swaps seriously and end up losing their money, especially when using leverage. To make your trading journey safer and more profitable, we will clarify in a beginner-friendly way what perpetual swaps are and how you can use them in your trading strategy.
Read the following lessons for more beginner-level futures trading knowledge:
What are the perpetual swaps?
Once in Huobi Futures, you will find perpetual swaps under the ‘COIN-M SWAP’ classification. Perpetual swaps are similar to other futures contracts in that they allow you to speculate on the future price movements of tokens without actually owning tokens (no custody). But unlike other futures, perpetual swaps don’t have an expiry date, which means you can hold the position for as long as you want without having to constantly re-establish your long and short positions.
Perpetual swaps also differ from other futures contracts in that their prices are often the same as or close to those of the underlying tokens. This is why you may see the same price for a particular token on Huobi Global’s spot market and Huobi Futures.
Exchanges like Huobi Futures achieve the peg of the swap price to the spot price through a ‘funding rate mechanism’ that continuously balances short and long perpetual swap positions by incentivizing or disincentivizing those on either side — think of this as a rebate or fee to hold a position. However, the swap price can also diverge greatly from the spot market during extreme market volatility.
What makes perpetual swaps even more attractive is the possibility of taking leverage. For example, the maximum leverage you can take on Huobi Futures is 200x, which means you can take a position worth 200 times your collateral. With perpetual swaps, not only can you enter a position without an expiration date, custody of a token or having a peg to a spot price, you can also enter a position larger than your account balance. Because of these properties, it’s obvious why perpetual swaps have dominated the crypto ecosystem by volume.
How can you use a perpetual swap?
We will use an example to show you how you can use perpetual swaps to make a profit. In this hypothetical situation, the price of a Bitcoin (BTC) is 10,000 USD, and you have a firm conviction it will triple in a matter of months.
You bet on a rise in BTC price relative to USD by buying a 1 BTC/USD perpetual swap contract using 10,000 as collateral.
Now, four months later, the price of Bitcoin is close to 30,000 as you predicted, and you decide to exit the position and secure the profits. In the meantime, as part of the funding rate mechanism (the continuous balance that keeps the perpetual swap price close to the underlying token price), you periodically lost a fee or received a rebate.
In this scenario, you made a profit of 20,000 USD in just four months (minus the funding rate fees or rebates) — without holding actual BTC tokens.
Perpetual swaps combine the desirable qualities traders seek from spot and futures markets, allowing them to concentrate on price actions without the technicalities or security risks associated with storing and holding tokens, or the hassle of opening and closing expiring futures contracts. However, as with any leveraged trade, note that such trades can be especially risky, so make sure you fully understand what you are doing before proceeding.