Crypto Derivatives Explained: Perpetual vs. Futures

[00:00] difference between crypto futures and crypto perpetual futures, otherwise here and why would you want to trade one versus the other? So, we'll go over description below as well if you want to skip around.

[00:13] futures are. Uh so, usually when you trade any asset, trade in the spot market, which is a cash-settled market. So, if I want to buy Bitcoin, I go into the spot market, I exchange dollars for Bitcoin, and that

[00:29] exchange happens immediately. That is a physical transaction, and so I then receive the Bitcoin, and that's my property, and I can withdraw it from the platform. Right, it's my asset. So, with futures,

[00:42] these are derivatives, which means they are a product of the spot market. So, when we trade in the derivatives market, like futures or perpetual futures, what we're actually trading is a synthetic contract

[00:57] based on the price of something else, cuz it's a derivative of something else, cuz it's a derivative of something else, right? So, Bitcoin USDT is a spot market, right, where you can exchange, physically exchange, dollars for

[01:09] Bitcoin, and that has a price. Now, in the futures market, what you're is trading some expected outcome in the future. And so, the derivatives market is literally a market of people buying and selling prices. So, it's a contract

[01:25] between a buyer and a seller to exchange the value of that contract when they trade, and you open a position, and then later on you close a position. You never never own the Bitcoin, you never trade the Bitcoin. You're simply trading the

[01:40] And so, this allows us to do a few different things. You can go long, which going up. You can go short, where you benefit from the price going down. And that's like selling, but of course, you don't sell anything, cuz you're not

[01:54] we say long and short, because we're not actually buying the asset, we're just So, with a derivative, what you're doing is trading the price of the asset, and you open a position, and you close a position, and when you open and close,

[02:06] loss. When we trade derivatives and futures, we don't actually exchange any assets. Uh the only time we settle our balance is when we close our trade. So, we open the trade with the platform, and we take the other side of an another

[02:19] trader, and that's our open trade. Now, when we close our trade, we have to settle the balance. If we made a profit, we get the balance from someone else. If to pay to close a trade, pay for the loss, right? So, when trading futures,

[02:33] when you open the trade. You're just simply cash settling profits and losses between other traders. So, to trade futures, what we do is we put collateral into our account. Just think of this as cash, right? So, unlike spot, where if

[02:47] you want to buy $1,000 of Bitcoin, you have to have $1,000, you exchange not the same in futures or perpetual futures. All you do is put cash on the system, and that is there to pay for potential losses in your trades in the

[03:00] future. So, that collateral, for the most part, is dollars, right? Stablecoins, USDT or USDC. But, you can also put coin on these platforms as assets, because they have a value as well. Now, what's going to happen is you

[03:14] give this to the trading platform, and that is there as collateral to pay for future. And you only exchange that if you make a the other side of the trade will obviously be putting that cash into your

[03:28] So, you have collateral to pay for trades, and you only exchange when you close trades. So, that collateral is there. Now, with futures, you can trade with leverage, which is more than the value of your collateral.

[03:41] The reason being is that the the exchange doesn't really care what you trade is or anything else. The only thing they care about is that you can pay for potential losses in your trades. So, with trading with leverage,

[03:55] let's say you have $1,000 of cash, you can open a $10,000 trade if you want. Right? And the reason is is that you have $1,000 to pay for a potential loss in that trade. So, you can open a $10,000 trade with $1,000 cash. Now,

[04:07] if the $10,000 trade loses 10%, your cash therefore can't pay for any more losses, so you get liquidated, which means that cash is just used to pay off the trade, the trade is closed for you. So, trading

[04:22] perps and um expiry date futures, because you're just simply opening a trade of an amount, and as long as you can pay open. So, what you can see here on any trading

[04:36] futures, and we're just looking at perpetuals for now. of anything that you want. As long as you can pay for the loss, you can open the trade. And of course, if you do make a loss, then your cash will go out to

[04:49] on Bybit or some of the other crypto platforms I use, I'll link them in the deposit and trading bonuses via those links. Uh so, you can have a look, um video. So, as you can see here, there is, up in

[05:02] platform, there is a way to take leverage. So, I'm going to press Now, leverage is, let's say I've got $1,000, um I can trade with much more than that. So, I can open a $3,000 trade with 3x

[05:15] leverage, right? So, 3x leverage is three times my cash. So, a three thousand a $3,000 trade in relation to $1,000 cash is 3x leverage. Uh alternatively, you can say, let's say you have $1,000, and you want to trade

[05:29] 3x leverage, you open one open a $1,000 trade. Well, you're going to put $333 cash down to fund that. 3x leverage is the trade size in relation to how much trade with leverage, or you can just go

[05:43] to one, right, which is, if you have a $1,000 trade, you put $1,000 cash tied position. So, very different to spot. With both perps and expiry date futures, this is how you trade it. You put cash onto trade, you can then trade an amount

[05:57] have or less than the cash that you have. You can take leverage, and then of the profit and loss uh calculation becomes different, right? So, if you have very high leverage, so I've got $1,000 cash and a $10,000

[06:11] position, if that $10,000 position falls 10%, I get liquidated. So, that's obviously very risky. With, let's say, 2x leverage, I have $1,000 in the account, I open a $2,000 trade. Well, now I've got $1,000 cash to pay for that

[06:24] trade, so I can withstand a 50% loss before my uh cash gets liquidated. Now, perps and expiry date futures. And the clue's in the name, perps are perpetual. There is no expiry date to this contract. And so, we are basically

[06:37] trading the spot price of Bitcoin USD very closely, just in a synthetic contract. And with expiry date futures, there is an expiry date, and so we are trading what we think the price is going to be

[06:49] on that expiry date. So, if I go to futures here, you can see that the markets are all different dependent on the expiry date of that contract. So, this is the, let's say, choose this one, 26th of June 2026.

[07:02] You can see this is when the contract opened, and this is obviously throughout gone down. What traders are trading here is, what is the price going to be on the is, what is the price going to be on the 26th of June? Now, as the spot market

[07:15] comes down in price, it's much less likely that the price of the June expiry is going to be very high, and so the price of this contract also falls. As Bitcoin has recently recovered, the uh chance of the price on the 26th of June

[07:28] being higher goes up, and therefore this contract trades up as well. There is an out of these contracts before the expiry, no problem, but there is an expiry. With a perpetual future, there is no

[07:41] expiry. And this is essentially designed to track one-for-one the spot price forever, perpetually, right? And that the asset, you don't have to worry about an expiry or what will the price be at

[07:56] this point. Um the reason why you would trade in futures instead of spot is can trade with more than you have. It's also cheaper for trading fees, and also, you can take short positions. So, you can open a long, which is like buying,

[08:11] selling. Of course, we never actually exchange the asset, we're just putting cash down to fund trades. So, there are advantages to perpetual futures and short, lower trading fees, use leverage. But,

[08:24] date in the future. With perpetuals, it date. Moving on from that, there's a massive difference perpetuals and expiry managed and what they're supposed to do. Expiry date futures simply have an

[08:37] expiry date, and it's up to the market to determine what that contract trades at. If the market's very bullish, the contract itself will trade much higher than the spot price. So, the spot price could be 50,000, the expiry date future

[08:49] could be 80, 90, 100,000, cuz the market's very bullish, and it just the market's bearish, might be under that. Could be 25, 30, 40,000 under the spot price. It's up to the market. With perpetual futures, that is not what

[09:03] this contract is designed to do. With perps, because there's no expiry date, this contract is supposed to mimic one-for-one the underlying or real exchange rate for the asset that you're trading. So, this is Bitcoin dollars.

[09:18] This really should mimic one-for-one the actual price of this this currency pair. If it doesn't, then it's really quite a useless contract, right? Because if completely fluctuate away from the underlying spot price, then you're not

[09:32] thought you were trading Bitcoin dollars, the thing's going crazy, it's price. So, that contract is untradable at that point. So, with perpetual futures, what the exchanges need to do

[09:45] is make sure that this contract, the price of it, stays exactly in line with assets in the spot market. The way that they do that is through incentives to make sure that buyers and sellers are

[09:59] incentivized to push the price in a direction that is exactly the same as one. Basically, if the spot price of a perp or if the futures price of a perp

[10:12] in relation to the spot price, it's too expensive, right? So, what the exchange is it basically punishes people that are buying and pushing the price up with a

[10:24] funding rate. Think of it as like an interest rate. So, if you're responsible for pushing the price up too high in relation to the spot price, they're going to punish you by making you pay a fee.

[10:36] to go long. And the reason here is that it's a too high. And that fee that you have to pay as a buyer pushing the price up too high gets paid to the other side, to sellers. So,

[10:51] you're a buyer here and you're paying a fee to the sellers on this side of the book. And that is designed as an incentive not only to discourage you sellers to come in and take the other side of the trade and get some yield

[11:04] If the price of the contract is underneath the spot price, the price is too cheap, there's too many sellers. The exchange is going to step in and start to make the sellers pay money to the other side.

[11:18] says, "Hey, if you're a buyer, you you're now going to get paid this fee from sellers. Please come in and buy to move the price back up." So, that's a funding rate. If you trade and you have open positions in the

[11:32] perpetuals or the you know if you the perps market, this funding rate is or have to pay depending on where the price is in relation to the underlying spot price. You can see it up here. See the funding

[11:44] dependent on supply and demand. But the whole point of this fee is to make sure that if the price is too high, buyers pay. If the price is too low, sellers pay or shorts pay. And it's uh supposed to keep the price of the futures

[11:58] contract or the the perps contract exactly in line with the actual see me trade both perps and expiry date futures live and see how to enter trades, how to open long trades and short trades, and how to use leverage,

[12:11] the description. It goes through step-by-step exactly what to do. If you the exchanges I use, you can find those in the description, as well. I'm James from Invest Answers. Thanks for watching and I'll see you in the next one.