What are the disadvantages of long-term holding perpetual contracts?

Long-term holding of perpetual contracts can expose traders to significant capital requirements, impermanent loss risk, and the potential for compounding losses due to the absence of an expiry date.

Oct 22, 2024 at 03:00 pm

Disadvantages of Long-Term Holding Perpetual Contracts

1. Significant capital requirements: Compared to spot trading, perpetual contracts require traders to allocate a larger amount of capital as collateral to maintain their positions. This capital commitment can limit a trader's flexibility and agility in managing their portfolio.

2. Impermanent loss risk: Perpetual contracts are not tied to the underlying asset's spot price, but rather to its funding rate. The funding rate adjusts regularly to ensure the balanced distribution of profits and losses between longs and shorts. If the funding rate is consistently unfavorable to a trader's position, it can result in losses over time.

3. Compounding of losses: Unlike conventional futures contracts, perpetual contracts do not have an expiry date. This means that losses can accumulate over an extended period if market conditions are unfavorable, leading to significant drawdowns in the trader's account.

4. Limited time for position adjustments: Perpetual contracts require traders to constantly monitor and adjust their positions as market conditions change. If traders fail to make timely adjustments, their positions may be liquidated.

5. Potential margin calls: If the value of a perpetual contract position moves against a trader, the exchange may issue a margin call demanding additional funds to maintain the position's leverage. If the trader is unable to meet the margin call, the position may be liquidated, resulting in losses.

6. Complex and risky strategies: Perpetual contracts offer advanced trading strategies that can magnify gains but also increase the potential for losses. Long-term holding of perpetual contracts using such strategies requires a deep understanding of the market and substantial experience in financial trading.

7. Emotional impact: The high leverage and potential for significant gains or losses in perpetual contracts can lead to emotional trading decisions. Long-term holding of these contracts exposes traders to prolonged emotional stress and the potential for irrational behavior.