When it comes to trading futures, there are two main types to understand: monthly (or standard) futures contracts and perpetual futures contracts. Both are popular in cryptocurrency and traditional markets, but they differ in key ways. Here’s an overview of how each works, along with their unique advantages and drawbacks.
1. Monthly (Standard) Futures Contracts
Monthly futures, also known as standard futures contracts, are agreements to buy or sell an asset at a predetermined price on a specific date. They are called “monthly” because these contracts have set expiration dates, often occurring on a monthly or quarterly basis. On the expiration date, the contract is settled, meaning that either physical delivery of the asset takes place (in commodities markets) or the contract is cash-settled (in cryptocurrency and financial markets).
Key Features of Monthly Futures:
Expiration Date: Each contract has a set expiration date, which could be a monthly, quarterly, or another predetermined period.
Settlement Process: Upon reaching the expiration date, the contract is settled either by delivering the underlying asset or through cash.
No Funding Fees: Traders do not pay any funding fees in monthly futures since the contract will naturally expire.
Market Influence: Monthly futures prices may fluctuate as the expiration date approaches, often due to traders closing or rolling over their positions.
Example: If a trader buys a monthly Bitcoin futures contract expiring at the end of December, they are agreeing to buy Bitcoin at a predetermined price on the expiration date. If Bitcoin’s price rises above the contract price by expiration, the trader makes a profit. If not, they incur a loss.
2. Perpetual Futures Contracts
Perpetual futures contracts are unique because they do not have an expiration date. Traders can hold a position indefinitely, which is why these are called “perpetual.” To ensure the price of perpetual futures closely tracks the spot market price of the underlying asset, exchanges use a mechanism called funding rates. Funding rates are periodic payments made between traders based on the difference between the perpetual contract price and the spot price.
Key Features of Perpetual Futures:
No Expiration Date: Perpetual contracts can be held indefinitely, offering more flexibility to traders who wish to maintain their positions over the long term.
Funding Rate Mechanism: To keep the contract price in line with the spot price, exchanges impose a funding rate, which is periodically paid by either longs or shorts depending on the difference between the two prices.
Higher Leverage: Perpetual futures contracts often allow higher leverage than monthly futures, appealing to day traders and those looking for short-term gains.
Price Anchoring to Spot: The funding rate helps to minimize price discrepancies between the perpetual futures and the spot market, reducing arbitrage opportunities.
Example: A trader buys a Bitcoin perpetual futures contract without worrying about a set expiration date. If the contract price is above the spot price, they may have to pay a funding fee. If it’s below the spot price, they may receive a funding payment from short traders.
3. Pros and Cons
Conclusion
Monthly and perpetual futures each serve different types of trading strategies. Monthly futures are preferred for those seeking structured contracts with set expiration dates, while perpetual futures offer flexibility and the ability to hold positions long-term with dynamic price adjustments through funding rates. Understanding these differences can help traders choose the best option for their goals, risk tolerance, and preferred trading style.
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