Which is better, perpetual contracts or delivery contracts

Perpetual Contracts vs. Delivery Contracts: Which is Better?Introduction

In the realm of crypto derivatives trading, two main types of contracts stand out: perpetual contracts and delivery contracts. Each type offers unique features and caters to different trading strategies. This article aims to delve into the intricacies of these contracts and help traders make an informed decision on which is better suited to their needs.

1. Perpetual ContractsPerpetual contracts, also known as inverse swaps, are perpetual futures contracts that are traded on a margin basis. They do not expire, meaning traders can maintain positions indefinitely or until they manually close them.

Advantages:

• No expiry: Perpetual contracts eliminate the need to roll over positions at specific expiry dates, offering greater flexibility and potential for longer-term trades.
• Margin trading: Traders can leverage their positions with relatively low margin requirements, amplifying both potential profits and losses.
• Interest paid/received: Holders of perpetual contracts receive funding (interest payments) or pay funding rates (costs) based on the contract's funding index.

Disadvantages:

• No underlying asset delivery: Perpetual contracts do not offer the possibility of receiving or delivering the underlying cryptocurrency.
• Potential for infinite losses: Margin trading carries the potential for significant losses, especially due to large market swings or unfavorable funding rates.

2. Delivery ContractsDelivery contracts, also known as futures contracts, have a fixed expiry date where the underlying cryptocurrency is delivered or settled in cash.

Advantages:

• Underlying asset delivery: Delivery contracts offer the opportunity to receive or deliver the underlying cryptocurrency at the contract's expiry.
• Limited risk: Traders can only lose the value of their initial margin, so they do not face the potential for infinite losses like in perpetual contracts.

Disadvantages:

• Expiry: Delivery contracts have a defined expiry date, which may not align with the trader's desired holding period.
• Settlement: Delivering or taking delivery of the underlying cryptocurrency requires a separate settlement process.
• Higher margin requirements: Margin requirements for delivery contracts tend to be higher than for perpetual contracts.

Conclusion

The choice between perpetual contracts and delivery contracts depends on individual trading styles and objectives.

• Perpetual contracts are suitable for: Traders who prefer flexible, non-expiring positions and are comfortable with leverage and managing funding rates.
• Delivery contracts are suitable for: Traders who seek to hedge their holdings, take speculative positions with limited risk, or have a preference for physical settlement of the underlying cryptocurrency.

Ultimately, both perpetual contracts and delivery contracts play valuable roles in the crypto derivatives market, offering traders a range of options to tailor their trading strategies accordingly.