What is the difference between perpetual contracts and delivery contracts?

Understanding the Basics of Cryptocurrency Futures Contracts

Cryptocurrency futures contracts are derivative instruments that allow traders to speculate on the price movement of a digital asset without owning the underlying asset. These contracts come in two main forms: perpetual contracts and delivery contracts. Both serve different purposes within the crypto trading ecosystem, and understanding their distinctions is crucial for effective risk management and strategy development.

Perpetual contracts do not have an expiration date, allowing traders to hold positions indefinitely as long as they maintain sufficient margin.

Delivery contracts, also known as traditional futures contracts, settle at a predetermined future date by delivering the underlying asset or cash equivalent.

The absence of an expiry date in perpetual contracts makes them more suitable for short-term speculation and leveraged trading, while delivery contracts are often used for hedging or long-term investment strategies.

Key Differences in Contract Mechanics

One of the most significant differences between these contract types lies in how they are structured and settled.

• Settlement Process: Delivery contracts settle automatically on a specific date, either through physical delivery of the cryptocurrency or cash settlement. Perpetual contracts avoid this by incorporating a funding rate mechanism.
• Funding Rate: Perpetual contracts use periodic funding payments between long and short traders to ensure the contract price stays close to the spot market price. This doesn't apply to delivery contracts.
• Position Holding Duration: With delivery contracts, traders must decide whether to roll over or close their position before expiration. In contrast, perpetual contracts can be held for any length of time without worrying about expiry.

These structural variations influence how traders approach entry, exit, and risk exposure in each type of contract.

Trading Strategies and Use Cases

The nature of each contract affects the trading strategies employed by users.

Perpetual contracts are widely favored by day traders and scalpers due to their flexibility and the ability to maintain open positions without expiration concerns.

Delivery contracts appeal more to institutional investors and hedgers who want to lock in prices for future delivery or offset existing exposures in the physical market.

Traders using perpetual contracts often focus on capturing short-term price swings with high leverage, whereas those dealing with delivery contracts may prioritize aligning their futures positions with actual asset holdings or expected price trends over longer horizons.

Risk Management Considerations

Risk profiles differ significantly between perpetual and delivery contracts.

• Liquidity Exposure: Perpetual contracts typically offer higher liquidity due to continuous trading, making it easier to enter and exit positions quickly. Delivery contracts may see reduced liquidity as the settlement date approaches.
• Volatility Impact: The funding rate in perpetual contracts can add costs during highly volatile periods, especially if the market consistently favors one side (longs or shorts).
• Expiration Risk: Delivery contracts carry the risk of 'pinning' or unexpected price movements near expiry, which can result in slippage or unfavorable execution when rolling positions.

Understanding these nuances helps traders tailor their stop-loss levels, position sizing, and leverage usage according to the contract type they're engaging with.

Fees and Funding Structures

Fee structures vary depending on the contract type and the exchange offering them.

Perpetual contracts usually involve taker/maker fees similar to spot trading, along with recurring funding payments every few hours or daily.

Delivery contracts typically only incur standard trading fees, with no ongoing funding charges until settlement occurs.

Funding rates are calculated based on the difference between the perpetual contract price and the index price of the underlying asset. If the perpetual price is above the index, longs pay shorts, and vice versa. Traders should monitor these rates closely, as persistent imbalances can erode profits over time.

Exchange Support and Market Availability

Not all exchanges support both contract types equally.

• Major derivatives platforms like Binance, Bybit, and OKX offer both perpetual and delivery contracts across multiple cryptocurrencies such as Bitcoin, Ethereum, and Solana.
• Smaller exchanges might limit offerings to perpetual contracts due to lower demand for delivery-based instruments.
• Contract listings vary by asset and maturity, with popular coins having multiple delivery dates available simultaneously.

Traders should verify which contracts are available on their preferred platform and understand the specific terms, including settlement mechanisms and fee schedules.

Frequently Asked Questions

Q1: Can I convert a perpetual contract into a delivery contract?No, perpetual contracts and delivery contracts are separate instruments. You cannot convert one into the other. However, you can manually close a perpetual position and open a delivery contract if your trading goals change.

Q2: How are funding rates determined in perpetual contracts?Funding rates are calculated based on the difference between the perpetual contract price and the mark price (or index price). Exchanges publish these rates periodically—often every 8 hours—and they adjust dynamically based on market conditions.

Q3: Do delivery contracts always require physical delivery of the asset?No, many delivery contracts settle in cash rather than requiring physical transfer. Cash settlement means the difference in price is paid out in fiat or stablecoin, eliminating the need to handle actual crypto transfers.

Q4: Are there tax implications for trading perpetual versus delivery contracts?Yes, tax treatment can differ depending on jurisdiction and contract type. Some regions treat perpetual contracts as speculative instruments subject to capital gains or income tax, while delivery contracts may fall under futures tax rules. Always consult a local tax professional for accurate guidance.