12.08.2020
Perpetual Swaps

Perpetual Swaps: The True Smart Contracts Before Smart Contracts

If you’re a fan of trading and spectacular opportunities it presents, you know crypto swaps (not to be confused with SWAT) as a type of derivative with extra functionality. They’re like futures. But immortal. Kind of like Pops

Maybe you’re not fond of traders because, like politicians, they’re useless (people should contribute and grow meat and potatoes or at least put together furniture, right?). Then you know credit default swaps almost knocked out the US during the mortgage crisis in 2008-2009. Ouch! 

But what are they? Are they easy to trade? Are swaps and Bitcoin futures a great way to protect oneself from price volatility? 

Perpetual contracts: profit and risk

A swap contract, like futures contracts and CFDs, is a type of delayed-effect bet, in essence. Much like all trading, it’s about intelligent risk assessment. Swaps do it the smart way. They provide additional functionality, which makes them both a little more difficult to handle, but also it has more of a potential. 

Don’t forget to use all the help you can get! Traders use news, reports called PNLs, and technical analysis to predict price movements so they can keep trading increasing profits. 

Probably the best story you’ll see that illustrates awesomeness that swaps are is The Big Short, which we wholeheartedly recommend seeing. Here’s an example of how a genuine understanding of the market will get you buying the right product and calculating when the inevitable occurs so you can make money on it. Check out this awesome video with our hero Paddy if you want to understand the dangers of swaps:

Perpetual swap vs futures

If you trade futures contracts already, you’ll have a picnic with swaps. Perpetual swaps are a futures contract that doesn’t have an expiration date. On the other hand, you need to worry about funding. 

Perpetual Swap Vs Futures

Be careful about trading perpetual swaps! Like all advanced tools, they offer plenty of opportunities to mess up.

A perpetual swap is a contract between the buyer and the seller about selling/buying an asset in the future. The market for these contracts is tracking the price of the real asset, so prognosis can be made about where the price is going. 

You can learn more about traditional futures contracts here

Example

Buyers and sellers agree in advance when and at what price the purchase will happen. For example, 1 share of X is worth $1000. You make a deal with the seller that you will buy 3 shares for $1000 each in 2 months. It doesn’t matter how much these will cost then.

What matters is that you have an obligation to buy the 3 shares and spend $3000 in total. Now, getting it right is a matter of mastery. If you’ve made a deal to buy these at $3000 and they’re now worth $6000, great. If the reverse is true, you’re losing money. 

Why perpetual? 

Unlike with regular swaps, wherein the time to buy/sell is specified in advance, perpetual swaps are perpetual — you can hold on to them endlessly. 

Glossary

Glossary

Long and short positions. We’re not talking length here. So someone who sold shares without actually owning them is said to be short of assets. Those who have bought assets and own them are said to have a long position. 

A spot market is where you exchange financial assets for cash immediately. Derivatives like swaps and futures are not part of that. 

Watch your maintenance margins!

The maintenance margin is the minimum sum that an investor should have when purchasing something using brokers’ funds. It’s required to guarantee to the exchange the fact that you can pay the borrowed money back. 

Warning

Warning!

Swaps may or may not come with several types of fees at once, so make sure you know how much you’re paying. Users pay fees to make sure that the price of the swap market is anchored to the real price. 

Perpetual swap contracts explained

There are advantages to perpetual swaps that you will not get with other types of contracts. You will need to pay special attention to stop-loss orders though, we’ll tell you that much from the start. 

Leverage is probably the most attractive part of the deal. You’ll get 100x leverage with these swaps, which can be a good thing if you know what’s up. However, it gets very dangerous very quickly if an exchange decides to close your position because you didn’t think your moves through. You can sell your car and buy Bitcoin and hold your position until 2024 when extremely likely Bitcoin will be worth more by an order of magnitude. But with leverage no. 

What’s leverage?

Leverage is another way of saying “borrowing money”. Traders borrow money from brokers (or it can be community money). The magnitude is greater, and so are the risks.

What is de-leveraging?

leveraged trading

As far as funding rates go, ADL (automated deleveraging) has to be mentioned if we’re talking leveraged trading. Essentially, an exchange will loan you the money (for example, you have $5000 and you can borrow ten times more and then you trade with yours and the exchange’s funds). 

However, with a 10x multiplier your wins will grow if the price goes up but losses are also multiplied by 10. When you lose too much money the exchange will liquidate your trade when it approaches the limit when it can sell your asset and get its money back. 

Sounds techy? See this video for details if you want to get into auto-deleveraging, insurance funds, longs and shorts, how mark prices influence liquidation, and so on:

What’s de-leveraging for?

Leverage (borrowing) is not a bad thing. It allows companies to get the funding they need.  Lipton borrowed a significant sum of money to start his tea company — and borrowing is the reason why many people today are actually getting through winters (by a kitty whisker)  through the use of tea. 

Finding a good site to trade on is a challenge. Where to go? Nominex, a stellar new exchange with the best affiliate system in the industry that can get you up to $50 000 a week, top-notch security, and the sexiest UX you’ve ever seen, is probably worth a shot. Just saying. 

Too much borrowing, however, is not a good idea and can put you in a bad position (or no position at all after the exchange wipes you out completely). 

What’s De-Leveraging For

Think of borrowing as air in a balloon. If there is too much borrowing, the economy becomes overinflated and at some point, a small event will be enough to trigger a disaster. As far as traders are concerned, auto-deleveraging can happen automatically if rules are not observed. To avoid this, one must be careful and avoid using colossal leverage (traders with greater leverage are the first to be ADL’ed).

So! By now you know the difference between futures and perpetual swaps, and also between ADL, which stands for Automatic DeLeveraging, ADSL modems, and ADDQD — awesome. 

Stay safe, watch the margins, see a psychologist regularly about the stress, and work out. Make intelligent decisions, stay cool and don’t be like this lone Wolf of Wall Street.

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