How Does the Concept of “Liquidation” Differ between Traditional Futures and Perpetual Futures Contracts in Crypto?
In both, liquidation is the forced closing of a position when margin falls below the maintenance level. Traditional futures have a set expiration date and are often physically or cash-settled then.
Perpetual futures, unique to crypto, have no expiration. Liquidation in perpetual futures is often a more rapid, automated process managed by the exchange's risk engine, typically involving an insurance fund to cover losses that exceed the liquidated margin.
Glossar
Perpetual Futures Contracts
Open-Ended Contract ⎊ Perpetual Futures Contracts are derivative instruments that track the price of an underlying asset without a set expiration date, allowing traders to maintain leveraged positions indefinitely, provided margin requirements are met.
Expiration Date
Settlement ⎊ An expiration date within cryptocurrency derivatives signifies the final date on which a contract’s underlying asset can be settled, impacting pricing models and risk exposure.
Traditional Futures
Derivation ⎊ Traditional Futures, within cryptocurrency and financial derivatives, represent standardized contracts obligating the holder to buy or sell an underlying asset at a predetermined price on a specified future date, differing from perpetual contracts through explicit expiry.
Futures Contract
Leverage ⎊ Futures contracts in cryptocurrency represent agreements to buy or sell an underlying asset at a predetermined price on a future date, functioning as a derivative instrument that allows for amplified exposure without immediate asset ownership.
Insurance Fund
Fund ⎊ In the context of cryptocurrency derivatives, options trading, and financial engineering, an Insurance Fund represents a dedicated pool of assets designed to mitigate systemic risk within a specific protocol or trading environment.
Perpetual Futures
Contract ⎊ Perpetual futures represent a type of financial derivative contract, specifically within the cryptocurrency and options trading space, that replicates the payoff of a traditional futures contract without a fixed expiration date.