As the cryptocurrency market is set to be evolving with each passing day and year, traders are presented with an array of derivative instruments so traders may speculate on them.
Two popular options in this landscape are Perpetual Futures and Quarterly Futures contracts.
In this article, you will explore their structures, features, and considerations to empower traders in making informed decisions based on their specific needs.
- 1 Understanding Perpetual Futures
- 2 Key Features Of Perpetual Futures
- 3 Quarterly Futures: The Overview
- 4 Key Features of Quarterly Futures
- 5 Comparative Analysis: Perpetual Futures vs Quarterly Futures
- 6 Conclusion
Understanding Perpetual Futures
Structure and Definition
Perpetual Futures are also called “perps” and are derivative contracts that are more like traditional futures contracts but lack a fixed expiration date.
Unlike quarterly and monthly contracts perpetual contracts allow the traders to maintain positions for an indefinite period.
This comes with a condition that the traders must maintain a margin and pay funding obligations.
Key Features Of Perpetual Futures
With the absence of a fixed expiration date, it distinguishes between perpetual futures and traditional futures contracts, therefore offering traders continuous exposure to the underlying asset.
For prevention of contract’s price deviation from underlying asset’s spot price, perpetual futures incorporate a funding mechanism.
This mechanism ensures that long and short position holders exchange payments periodically, hence maintaining a balance in market prices.
Perpetual futures often support leverage, enabling traders to amplify their exposure to price movements with a relatively small capital investment. However, where caution is warranted, leverage magnifies both gains and losses.
Perpetual futures contracts are usually signified by higher liquidity, hence attracting many traders to seek seamless execution and reduced slippage while making transactions.
Quarterly Futures: The Overview
Structure and Definition
Quarterly Futures, also called dated futures, adheres to the traditional form of future contracts.
They are more similar in structure to having fixed expiration dates, typically falling at the end of each calendar month.
Key Features of Quarterly Futures
Fixed Expiration Dates
The defining feature associated with quarterly futures contracts is their predetermined expiration dates.
Traders must seek to close their respective positions or keep on rolling them over to a new contract before the expiration date is near to avoid physical settlement.
Hedging and Institutional Use
Quarterly futures are commonly employed by institutional investors and businesses for the sake of hedging.
Due to the fixed expiration dates, they are more suitable to price risks associated with the underlying asset.
Less Frequent Trading
Compared to the perpetual futures, trading activities in quarterly futures may be less frequent due to the expiration dates. This structure attracts traders with longer term perspectives and specific time horizons.
In terms of liquidity, different quarterly future contracts may be generally less liquid as compared to the perpetual futures. This can result in wider bid-ask spreads and increased slippage during trading.
Comparative Analysis: Perpetual Futures vs Quarterly Futures
1. Continuous Exposure and Flexibility
Perpetual Futures are prominent in terms of flexibility, offering traders an ability to maintain positions without the constraints of fixed expiration dates.
This perpetual nature of appeal in the market makes them agile in trading strategies. Whereas in contrast, quarterly futures have fixed expiration dates, suitable with more structured time horizons and for traders that are seeking to align trading with specific events.
2. Risk Management and Hedging
Quarterly futures are more appropriate in terms of risk management strategies as they come with fixed time periods.
This allows businesses to manage their budgets in terms of prices and gauge prone risks.
Perpetual futures are not inherently designed to hedge but rather offer traders the flexibility to adjust positions in response to evolving market conditions, providing an array of alternative approaches towards risk management.
3. Trading Frequency and Leverage
Perpetual futures often attract traders to seek higher-frequency trading due to their continuous nature and hence support for leverage.
On the other hand, quarterly futures may be more suitable to those with longer term trading perspectives, as the fixed expiry dates align with specific events and quarters.
4. Market Liquidity
Perpetual futures typically boast higher liquidity, attracting a broad range of traders and reducing the impact of slippage.
Quarterly futures, as they vary in liquidity depending on specific contracts, may experience lower trading volumes and increased bid-ask spreads.
Regulations around perpetual and quarterly futures deviate. Perpetual and quarterly futures are traded on crypto exchanges and hence operate in a less regulated environment as compared to traditional quarterly futures that are established on traditional exchanges.
Traders should consider their risk tolerance and the level of regulatory oversight in terms of prioritization.
As the crypto marker is flourishing, the choice to go for specific future contracts whether perpetual or quarterly depends strongly on its features, such as returns and its benefits.
A couple of salient characteristics include navigation into the dynamic markets, with higher frequency trading, yield, time periods, extra features, funding rates as well as bid-ask spreads all play a key role in deciding which among the two is more suitable.
Traders should carefully evaluate the processes with the current and future landscape of crypto market.
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