Perpetual contract trading is essentially a way based on derivative trading. A derivative, as a financial instrument, has its value determined based on the performance of the underlying asset. In the cryptocurrency market, derivative trading usually involves the use of leverage to significantly improve the capital efficiency of trading. Perpetual contract trading, as an extremely popular derivative trading mode, is favored because it allows traders to use leverage up to 100 times and has no expiration date.
Different from perpetual contract trading, the core of leverage trading is to apply borrowed funds to the trading process. Leverage traders can achieve trading by depositing a small amount of funds in their accounts and borrowing more funds from the trading platform.
By using leverage, traders can increase the value of their investment portfolios with borrowed funds and obtain higher returns. However, it should be vigilant that leverage trading also significantly increases the risks faced by traders, as any losses generated will also be amplified in proportion.
It can be seen that the most critical difference between leverage trading and perpetual contract trading lies in the source of funds. In perpetual contract trading, traders use the leveraged funds provided by the platform to trade. In leverage trading, traders borrow funds from trading platforms or other loan sources (such as banks or individuals) to conduct trading.
Another significant difference lies in the calculation method of the leverage ratio. In perpetual contract trading, the leverage ratio is preset by the trading platform. Traders can choose their leverage ratio according to their own needs, usually ranging from 2 times to 100 times.
However, in leverage trading, the leverage ratio depends on the amount of funds borrowed by traders from trading platforms or other sources. Usually, the leverage ratio is generally between 2 times and 10 times.
In addition, the risk management mechanism of perpetual contract trading is also significantly different from that of leverage trading. In perpetual contract trading, the trading platform usually sets a forced liquidation price, aiming to limit the amount of losses that traders may bear.
When the price reaches this specific price, the position will be automatically liquidated. In leverage trading, the forced liquidation price is usually calculated based on the borrowed amount. In contrast, in perpetual contract trading, the forced liquidation price is usually calculated based on the maintenance margin ratio stipulated in the contract.
There are also significant differences in transaction fees between the two. In leverage trading, borrowing fees and transaction fees are generated. The borrowing fee starts to be calculated at the moment of lending out assets, usually charging interest on a daily basis, while contract trading is generally charged only when buying and selling (or delivery), and perpetual contracts also generate funding fees. At the same time, leverage trading charges fees according to the standard of spot, and the rate is usually about 0.1%, while the rate of contract trading is usually between 0.02 - 0.05%.
The maintenance margin ratio refers to the minimum proportion that must always be retained in the margin account, usually presented in the form of a decimal, such as 0.5 or 0.75. When the margin ratio in the account is lower than the maintenance margin ratio, the exchange will issue a warning to notify the trader to promptly add margin to avoid forced liquidation.
If the margin ratio in the account continues to decline and drops to the forced liquidation ratio specified by the exchange, the exchange will automatically perform forced liquidation operations on the position.
In leverage trading, the forced liquidation price is determined by the leverage multiple and the current market price. Therefore, in high-leverage trading, small fluctuations in price may lead to greater risks, and the risk of forced liquidation also increases accordingly.
In perpetual contract trading, since the forced liquidation price is related to the maintenance margin ratio, the risk brought by price fluctuations is relatively smaller compared to leverage trading.
In general, although perpetual contract trading and leverage trading have some similarities, there are significant differences in aspects such as the source of funds, the calculation of leverage ratios, risk management, and transaction fees.
When choosing a trading method, traders need to comprehensively consider many factors such as their risk tolerance, trading experience, and the actual situation of the market to formulate the most appropriate trading strategy.
Leverage in cryptocurrency trading enables you to easily start your trading journey with a relatively low initial investment amount and potentially bring you more considerable profits. However, leverage is closely linked to market fluctuations and may quickly trigger forced liquidation, especially in extreme cases of trading with leverage up to 100 times.
Therefore, before conducting leverage trading, always maintain a cautious attitude and comprehensively assess potential risks. Do not trade amounts of funds that exceed your personal risk tolerance, especially when using leverage.
