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Futures Operation Mechanism

2023.08.2 MEXC

Cryptocurrency markets have witnessed some derivatives innovations distinct from traditional financial markets, with perpetual futures being the most representative example. Futures, as financial instruments, have become an integral part of the global financial market due to their effective volatility and risk management. While some may be intimidated by their complex trading methods, others love them for their potential to significantly increase profits. When armed with sufficient knowledge and a clear strategy, futures stand out as a preferred choice for trading. This article will explain what perpetual futures are, how they work, and highlight the features of this financial instrument to provide insights for your futures trading endeavors.

1. Definition

Perpetual futures, also known as perpetual futures contracts, are financial derivatives with digital assets as their underlying assets. They are abbreviated as "PERP." For instance, Bitcoin perpetual futures is denoted as "BTC-PERP." There are several differences between perpetual futures and traditional futures contracts:

  • Firstly, perpetual futures do not have any settlement or expiration date.

  • Secondly, the trading price closely tracks the spot price, while traditional futures contracts may have significant price discrepancies.

  • Thirdly, a funding mechanism is utilized to peg futures prices to the spot market price.

2. Settlement Date

As the name suggests, perpetual futures differ from conventional futures because they do not have a specific settlement date. In other words, they have no expiration date. Traders can hold their positions and trade within a suitable timeframe.

3. Settlement Mechanism

Traditionally, settlement refers to converting assets into cash. In perpetual futures trading, unprofitable positions are liquidated to prevent traders' accounts from falling into a negative balance. Conversely, profitable positions are settled. The price used in the settlement is used to calculate the floating PNL of positions and determine the liquidation of positions.

Different exchanges may use different settlement prices.

3.1 Fair Price

On MEXC, the basis for perpetual futures trading is the fair price, which is calculated based on the index price and the market price. Consequently, the trading price of perpetual futures is usually equal to or close to the spot market price. It is the price discrepancy that leads to the concept of funding rate faced by MEXC traders during trading.

3.2 Funding Rate

  • Theprimary mechanism that helps perpetual futures track the spot price is funding. Simultaneously, the price difference between perpetual futures and the spot market (the price difference in funding, known as funding rate) determines the payer and the recipient of the funding fee. Traders pay the funding fee to each other based on their open positions during specific periods.

  • Therefore, long traders pay short traders when the funding rate is positive, and short traders pay long traders when the funding rate is negative. Detailed information can be found in the Information section on the page for each trading pair.

  • Traders pay or receive funding fees proportionate to the size of their market positions. These payments occur only between traders, and the exchange does not pay nor charge funding fees.


4. Conclusion

On MEXC, you can achieve profitability through various financial instruments. When dealing with perpetual futures trading, it is essential to understand its mechanisms, be clear about the costs associated with each trade, and never invest more than you are prepared to lose. These simple strategies will help you succeed in trading perpetual futures, a fascinating and potentially rewarding financial instrument.

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