What are Inverse Perpetual Contracts?
Inverse Pepetuals are special types of futures contracts that take crypto as the base currency and settle the contracts by it. For example, BTCUSD Inverse Perpetuals take BTC as the base currencies and utilize them for margin as well as settlement. Perpetual contracts have been a unique feature in the cryptocurrency derivatives market and are readily available and frequently used by investors — sometimes much more than spot purchases. Furthermore, unlike traditional futures contracts that need to be settled at maturity, these inverse perpetual contracts can be held indefinitely, without an expiration date.
How do they work and how are they profitable?
The Inverse Perpetual and normal Perpetual Contracts (Linear contracts) are quite similar but differ in the base currency and settlement type.
Let’s take the example of Bob, an experienced BitYard trader who is starting his journey trading Inverse Perpetual Contracts. For illustration purposes, let’s assume that the price of Bitcoin is approximately $10,000 and BOB has 0.10 BTC ($1,000).
Bob purchases 5,000 long inverse perpetual contracts with 5x leverage, as 5,000 USD * 1 = 5,000 (1 Contract = $1). This essentially means Bob is selling 5,000 USD and buying an equivalent of 0.50 BTC. Suppose BTC increases from $10,000 to $12,000 in a month and Bob wants to close the position.
His PnL would be calculated as follows:
BTC P&L = Number of contracts (1/Buying Price — 1/Selling Price)
BTC P&L = 5,000 (1/10,000–1/12,000) = 0.083 Bitcoin
The price is quoted in USD, but margin and settlement occur in BTC.
It is important to note that the Inverse Perpetuals’ P&L is not linear like normal perpetual contracts. When you are in a long position, you will receive less BTC when the price increases since the value of Bitcoin increases with USD. When the price of bitcoin reduces, you will lose more BTC as the value of bitcoin is much cheaper. A similar concept applies when taking a short position in Inverse Perpetuals.
What are the benefits of trading Inverse Perpetuals?
Best of both worlds: Inverse perpetuals offer traders the best of both spot and futures, making it convenient and easy for them. Inverse perpetuals offer investors leverage that spot markets don’t offer and provide indefinite holding periods that futures contracts lack.
Maintain cryptocurrency positions: If the user has some Bitcoin in his long term holdings and does not wish to sell them to realise profits, he can use these holdings as collateral to open positions in the inverse perpetuals market.
Hedging Strategy: Hedging is a risk management technique used by investors to offset losses by taking both sides in an asset. Assume that BTC is trading at $20,000, and you hold one bitcoin. Considering the perpetual is trading at a similar price of $20,000 also, you are able to short 20,000 contracts to hedge your position. This way, you end up in a neutral position, and price fluctuations do not affect your portfolio.
USD not required: The entire process of trading perpetuals does not require USD. Therefore, this could benefit those who are not keen on using stablecoins due to any regulatory reasons.
Trade Inverse Perpetual Contracts on Bityard
Bityard launched its Inverse Perpetual Contract on November 15th for its mobile app. BitYard users are able to log in and start using inverse perpetuals to grow their portfolios. The BitYard App is available on the app store and the google play store.
Current Supported Pairs: BTCUSD, ETHUSD, DOTUSD, XRPUSD
More inverse perpetual pairs are coming soon on BitYard, so make sure you stay tuned for more updates!
Note: None of the information in this article contains financial advice. Inverse Perpetual Contracts does contain risks like any other derivatives. Therefore, it is advised that you understand the risks and are experienced in trading before taking any positions.
Founded in late 2019 and headquartered in Singapore, BitYard is a leading global cryptocurrency derivatives exchange. As one of the fastest-growing exchanges, BitYard has continuously optimized and upgraded the platform and has brought many quality trading services to users worldwide. With the new corporate slogan “Grow Your Future in the Yard” BitYard will continue to help investors around the world to achieve their goals through providing one-stop financial trading services.