What is the difference between perpetual contracts and delivery contracts? How to choose?

Understanding Perpetual Contracts

Perpetual contracts, also known as perpetual futures, are a type of derivative contract commonly used in cryptocurrency trading. Unlike traditional futures, perpetual contracts do not have an expiration date, which means traders can hold their positions indefinitely, provided they meet the margin requirements and avoid liquidation.

One of the key features of perpetual contracts is the use of a funding rate mechanism. This system ensures that the price of the perpetual contract stays close to the spot price of the underlying asset. Funding rates are typically exchanged between long and short traders at regular intervals (e.g., every 8 hours). If the funding rate is positive, longs pay shorts; if it's negative, shorts pay longs.

Traders often prefer perpetual contracts for speculative purposes or when they want to maintain exposure to an asset over an extended period without worrying about contract expiry.

Exploring Delivery Contracts

Delivery contracts, sometimes referred to as traditional futures contracts, are agreements to buy or sell an asset at a predetermined price on a specific future date. These contracts have a set expiration date, after which the settlement occurs—either through physical delivery of the asset or cash settlement.

In the context of cryptocurrencies, most exchanges settle delivery contracts in fiat currency or stablecoins rather than delivering the actual digital asset. The presence of an expiration date makes these contracts suitable for traders who have a defined time horizon for their strategy.

Unlike perpetual contracts, delivery contracts do not involve funding rates. Instead, the difference between the spot price and the futures price is naturally resolved as the contract approaches its expiration date.

Key Differences Between Perpetual and Delivery Contracts

• Expiration Date:Perpetual contracts lack an expiration date, allowing indefinite holding. In contrast, delivery contracts have a fixed maturity date.

• Funding Mechanism:Perpetual contracts rely on periodic funding rate adjustments, while delivery contracts do not use such a system.

• Price Convergence:As delivery contracts approach expiration, their price converges with the spot market. For perpetual contracts, this convergence is maintained via funding rates.

• Trading Strategy Suitability:Perpetual contracts are ideal for long-term positioning and day trading. Delivery contracts are better suited for strategies tied to specific timeframes, like arbitrage or hedging.

• Liquidity and Depth:Perpetual contracts generally offer higher liquidity due to continuous open interest and no expiry. Delivery contracts may see fluctuating liquidity depending on proximity to expiry.

Risk Management Considerations

Both perpetual contracts and delivery contracts come with unique risk profiles. When using perpetual contracts, traders must be mindful of funding costs, especially during prolonged holding periods. Positive funding rates can accumulate and erode profits over time.

For delivery contracts, the main concern lies in rollover risks. Traders who wish to maintain exposure beyond the contract’s expiry must manually close their position and open a new one in the next contract cycle. This process may result in slippage or additional transaction fees.

Additionally, both contract types expose users to liquidation risks if leverage is used improperly. It’s crucial to monitor margin levels and adjust position sizes accordingly.

How to Choose Between Perpetual and Delivery Contracts

Choosing between perpetual contracts and delivery contracts depends on your trading style, investment goals, and risk tolerance.

• If you engage in short-term speculation or intraday trading, perpetual contracts are more convenient because they eliminate the need to track expiry dates.

• If your strategy involves arbitrage opportunities, calendar spreads, or hedging against spot holdings, delivery contracts may be more appropriate.

• Consider your holding period. If you plan to hold a position for weeks or months without active management, perpetual contracts allow for uninterrupted exposure.

• Evaluate your risk appetite regarding funding costs. Long-term holders should assess whether funding rates will negatively impact returns over time.

• Always review the fee structure, liquidity, and market depth of the chosen contract type before entering a trade.

Step-by-Step Guide to Opening a Perpetual Contract Position

• Select a reputable exchange that offers perpetual futures for the desired cryptocurrency.
• Create and verify your account, and complete any required KYC procedures.
• Deposit funds into your futures wallet, ensuring sufficient margin for trading.
• Navigate to the futures trading section and select the perpetual contract pair you're interested in.
• Set your leverage level based on your risk profile—common options include 5x, 10x, or 20x.
• Choose between long or short position depending on your market outlook.
• Enter the amount you wish to trade and confirm the order.
• Monitor funding rates and ensure you have enough balance to withstand potential funding deductions.
• Use stop-loss and take-profit orders to manage your risk effectively.

Frequently Asked Questions

Q: Can I convert a delivery contract into a perpetual contract?No, you cannot directly convert a delivery contract into a perpetual contract. You would need to close your position in the delivery contract and open a new one in the perpetual contract market.

Q: Are funding rates predictable in perpetual contracts?Funding rates are determined by market conditions and are usually published in advance by exchanges. However, they can change frequently based on supply and demand dynamics.

Q: Which contract type is better for beginners?For beginners, perpetual contracts may be easier to use due to the absence of expiry dates. However, understanding funding rates and liquidation mechanics is essential before trading either type.

Q: Do all exchanges offer both perpetual and delivery contracts?No, not all exchanges provide both types of contracts. Some platforms specialize in perpetual futures, while others may only list quarterly or bi-weekly delivery contracts.