Crypto Perpetual Contracts Introduction

Cryptocurrency futures trading has slowly started to gain popularity and has witnessed the expansion of the whole crypto market.

Perpetual contracts were invented by BitMEX in 2016. They are similar to a traditional futures contracts, but have a few differences:

1. There is no expiry or settlement.

2. Perpetual contracts introduce the mark price and funding fee mechanisms to ensure that trade price of a futures contract converges to the underlying spot market.

Mark price is introduced to avoid unwarranted liquidations that could result from high volatility of crypto assets. Mark price is generated based on the underlying spot market and is ensured to converge to the spot price. Most of the time, mark price is a good basis to calculate the unrealized PNL.

Funding fee is introduced to balance the long and short forces. If the trade price is higher than mark price for the funding period, then the exchange tends to let those with long positions pay the funding fee to traders with short positions to compensate for the over-pricing. Funding fee is exchanged only between traders.