perpetual futures

Perpetual Futures Hedge

for Cryptocurrency

A Perpetual Futures Contract is a futures agreement for cryptocurrency pairs based on the current market or spot price with no expiration date. Investors can hold a position until they decide to close it.

This derivative is a means to speculate on the price of a cryptocurrency pair without directly holding the underlying instrument. As a hedge, it allows one to protect their actual holdings from adverse market conditions.

When opening a leveraged position, you have to make a "down payment." This payment is known as the initial margin. Furthermore, there is a maintenance margin representing the minimum amount of collateral to keep the position open—this cost changes based on market price. If your account falls below the maintenance margin, the broker may close your position.


Suitability:

most investors

Most Investors

Since the contract involves spot price instead of future speculation, it is suitable for most investors.

Protection:

moderate

Moderate

Protection from adverse market conditions is adequate. However, a shift in the markets remove the protection.

Cost:

moderate

Moderate

Initial cost is average, but leverage combined with a market shift gets expensive.


Example:

An investor has one BTC worth $10,000. Concerned with recent market activity, they want to protect their holding. One option is to take an equal position in the opposite direction. The problem is that it would risk another $10,000.

Instead, they take a perpetual futures contract worth 1 BTC in the opposite direction. As a result, only $1000 is risked instead of the full $10,000. If the market goes down, this perpetual contract will protect the BTC they own. If the market goes up, they can sell the contract with minimal loss.


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© 2020 Todd Moses

The strategies discussed are for illustrative and educational purposes and are not a recommendation, offer, or solicitation to buy or sell any currency or to adopt any investment strategy. There is no guarantee that any strategies discussed will be useful. Todd Moses is not a licensed securities dealer, broker, or US investment adviser or investment bank.