What Are the Risks Associated with Trading Perpetual Contracts?
The main risk associated with trading perpetual contracts is the risk of liquidation. This can happen if the price of the underlying cryptocurrency moves against your position and you do not have enough margin to cover your losses.
Other risks include the risk of high funding rates, which can eat into your profits, and the risk of counterparty risk, which is the risk that the exchange you are trading on will go bankrupt.
Glossar
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.
Trading Perpetual Contracts
Contract ⎊ Trading Perpetual Contracts involves the buying and selling of a specific type of futures agreement, predominantly found in cryptocurrency markets, that possesses no expiration date or fixed settlement date.
Perpetual Contracts
Mechanism ⎊ Perpetual contracts, fundamentally, represent agreements to buy or sell an asset at a specified future date, differing from traditional futures through the absence of an expiration date; this continuous settlement is achieved via a funding rate, exchanged between long and short positions to anchor the contract price to the underlying spot market.
Liquidation Cascade
Trigger ⎊ A liquidation cascade, within cryptocurrency and derivatives markets, initiates when an asset’s price declines sufficiently to trigger margin calls for leveraged positions.