KTX Education: Perpetual Edition ⌛
A guide to understanding perpetual contacts
In this forth edition of our Educational Series, it’s time to address the massive market in the room: Perpetual Futures.
Futures contracts and perpetual futures are a huge part of trading markets and are a staple of trading on Decentralized Exchanges and Perp Dexs. In fact, it is the most utilized financial instrument on-chain!
So if you’re a trader or one in the making, this is an essential part of your base of knowledge.
Let’s get into the meat and potatoes of it shall we?
What are Perpetual Futures? ♾️
Perpetual Futures / Perpetual Swap Contracts (and Futures Contracts) are derivatives, which means they get value from an underlying asset or index. In our case this means Bitcoin, Ethereum, and other Crypto assets.
When someone trades a Perpetual future (or Perps for shorthand), it is the same value as the spot or index pricing of an asset.
This is different from futures contracts which can deviate from the underlying price since they are not tied to the index price, but are more of a prediction of future price.
Perps came into existence when gold miners needed to hedge their Gold exposure. The problem with this strategy? They used futures contracts to do this and oftentimes, the futures price would expire at a higher price than the index.
So they would hedge the spot price of Gold and actually lose money due to the futures price being higher on expiry. This is called basis risk, or when the price of a futures contract doesn’t converge with the spot price of the underlying asset upon expiry.
The nice thing about Perps is that they don’t expire like futures contracts. This allows you to maintain your hedge, use leverage when necessary, and trade assets that you may not have had access to.
Specifically this benefits Crypto because you’re able to take a spot position that you plan on holding for a long time (like BTC or ETH) and hedge yourself on that position via perps when volatility or macro instability threatens your holdings.
Perpetual futures are now the most liquid derivative in all of DeFi, making for a pretty handy addition for traders and investors alike.
Why do we need Perpetual Futures? ❓
There are 3 main reasons that Perps are beneficial to the DeFi ecosystem and traders:
- Leverage and Margin
- Directionality
- Portfolio Hedging
Each has their own merits but let’s get in the weeds a little bit and see why each are important!
Leverage and Margin 🎚️
Perp futures are one of the most useful tools in any DeFi natives’ arsenal but it can also be equally as devastating due to the power of leverage.
Leverage allows you to maximize your exposure to any asset by letting your positions be utilized as collateral. In this case when you trade on KTX, the KLP pool is used to add margin to your position.
Margin is the amount of money you need to put up as collateral for each trade.
For example:
- You have $1,000 of ETH at your disposal and want to long on KTX using our ETH-USD perpetual contract.
- You choose 10x leverage which means your $1,000 of ETH will now be $10,000 worth of ETH-USD.
- Sounds great doesn’t it! But wait for the punchline…
- This is inherently risky, even though you could earn a 20x upside. Leveraging your entire position can cause you to be liquidated off of a relatively small move to the downside!
- Make sure you’re always paying attention to your liquidation point and are using risk management during any sort of trading!
KTX currently offers leverage up to 100x! Incredibly capital efficient, but use it wisely!
Leverage/Margin are quite an effective use of perpetual futures as long as you can manage your risk!
Directionality ↕️
Perhaps the simplest benefit to Perpetual futures, but directionality just means being able to trade long or short.
Essentially, wen up or down?
Worth noting here that holding spot has some differences that you should be aware of, if you’re not already.
Holding a spot asset like BTC by default means that you are long, as you’re profiting on it going up.
- Going long on a perpetual contract with leverage is the same thing but with more amplification.
- This means more extreme profit and loss.
Where holding spot falls short of trading perpetual contracts, is you don’t profit from any sort of downside. You don’t get to play both sides of the market.
Being “short” in spot usually indicates being in all stablecoins, but you still don’t get any gains from markets dropping. You just avoid losses.
But being able to short an asset opens up a completely new set of opportunities in which you can profit.
This ability to go long or short an asset directly leads into our next benefit.
Hedging 🦔
Another use for perpetual futures is the act of Hedging.
- Hedging is a way to protect your portfolio from downside, primarily by shorting an asset.
If you kept your $1,000 ETH spot position from the prior example and thought that the market might experience a pullback, you could hedge your position using perps.
On KTX, you would take a short position in ETH-USD at an equal amount to your spot position and benefit from the short term downside.
Hedging with leverage is incredibly capital efficient…if you can stomach the potential volatility.
With $1,000 in ETH spot, you could hedge it in a few different ways:
- Short $1,000 ETH-USD at 1x leverage
- Short $500 ETH-USD at 2x leverage
- Short $100 ETH-USD at 10x leverage
This would allow you to take profits on this short position when you feel the downside move is over without having to exit your spot ETH position.
Being able to hedge with different amounts of capital due to leverage is a potential gamechanger for people as well. You could use the extra funds elsewhere in the market if you so choose to.
But the higher the leverage used, the closer your liquidation is to where you entered the position, so keep that in mind!
Hedging is a really efficient way to play both sides of the market without having to sell your core holdings, and using perpetual futures means you can do this indefinitely without having to worry about expiries. This would be most beneficial during a down-only bear market.
Deciphering Open Interest 🔍
If you’ve been on a Perp Dex at all, you’ve probably seen open interest somewhere on the trading UI.
And if you’re on Crypto Twitter, you’ve definitely heard about open interest as its talked about quite often.
So what is open interest and why does this matter?
- Open interest is defined as the collective notional value of all active positions including long and short positions.
This can give traders a sense of which side of the market participants are heavily favoring. Which can be used to help them determine what their next step might be.
These numbers can be viewed on KTX, shown below.
One way this could be used by traders is by observing when one side gets inflated more so than the other.
This phenomenon is called skew.
Skew is an imbalance between longs and shorts.
An increase in short positions could mean that a majority of traders are expecting a bearish move or trend to start, an increase in longs would mean they could expect a bullish move or trend.
Another scenario could be if open interest increases quickly with long positions but price continues to drop. This would cause those traders to exit their longs, which would cause further decline in the market.
There are plenty of reasons to know about open interest and it is a great tool to have so keep an eye out while you’re trading!
How does Open Interest affect you on KTX? 🤭
On KTX, we offer a few different ways for you to benefit from open interest and you may not even realize it!
We do this through our Dynamic Fees!
Our Dynamic fees accomplish 2 things that’ll benefit you:
- Opening Fees are cheaper when Asset Utilization (Open Interest / AUM) is lower than optimal.
- Closing Fees are cheaper when Asset Utilization (Open Interest / AUM) is higher than optimal.
This was designed so you can enjoy lower fees on KTX no matter what!
But our next segment will be even more important for your fees, so don’t stop reading yet!
Blindbox Rush 🎁
Blindbox Rush is still ongoing, but now we’re ending this campaign really soon! By trading, staking or referring friends over to KTX, you will be able to win arcade points and open blindboxes.
What’s more, there are now Citizens of Mantle “Dino Helmet” Add-on traits included in the blindbox rewards.
This is one of the easiest ways to earn some rewards while doing that trading thing people do!
It makes KTX one of the cheapest places to trade and get the most bang for your buck so make sure you check it out!
For more information on this campaign and many others, make sure you’re looking at our most recent Medium articles!
