BingX Standard Futures vs Perpetual Futures: Which is Better for Traders?
What Are Futures Contracts?
Futures contracts, both standard and perpetual, allow traders to speculate on the future price of an asset without actually owning it. Traders can either go long (betting that the price will rise) or short (betting that the price will fall). This enables profits from price movements without the need for buying and storing the actual asset. In cryptocurrency, this is a highly attractive option, given the market’s volatility.
However, not all futures are the same, especially on platforms like BingX, where you can choose between standard and perpetual futures.
Perpetual Futures: What Makes Them Different?
A perpetual futures contract is a type of derivative that has no expiration date. Unlike standard futures, which have a set date of expiration, perpetual futures can be held indefinitely, as long as you maintain the margin to back them. This flexibility is a major draw for traders who want to keep their positions open over long periods or until they achieve their desired profit.
Key characteristics of perpetual futures include:
No Expiry Date: As mentioned, perpetual futures don’t expire. This means that traders can hold their position for as long as they want, which offers a degree of flexibility that standard futures don’t provide.
Funding Rates: To maintain the balance between the contract price and the spot price, exchanges like BingX employ a funding rate mechanism. This rate is periodically exchanged between buyers and sellers. When the market is bullish, those holding long positions may have to pay shorts, and vice versa during bearish conditions. The funding rate ensures that the price of the perpetual futures contract does not drift too far from the underlying asset’s price.
Leverage: BingX allows traders to use leverage, which amplifies both potential profits and losses. Leverage lets you control a large position with a relatively small amount of capital. With perpetual futures, this can be very enticing for traders seeking to make the most of short-term price movements. However, it also increases risk, so it’s essential to manage your positions carefully.
Liquidity: Perpetual contracts generally have higher liquidity, especially in the cryptocurrency markets. Since they are more popular than standard futures contracts, you’ll often find tighter spreads, which means that you’ll lose less money to fees and slippage when entering and exiting trades.
Risk of Liquidation: Given the leverage involved and the volatility of the cryptocurrency market, traders run the risk of having their positions liquidated if they don’t maintain adequate margin levels. While this is true for both standard and perpetual futures, the lack of an expiration date in perpetual contracts can sometimes lead traders to hold onto losing positions for longer than they should.
Standard Futures: A More Traditional Approach
Standard futures, on the other hand, are contracts that expire on a specific date. The expiration date is predetermined, meaning that traders must settle their positions by then. These contracts are more commonly used in traditional financial markets, such as commodities and stock indices, but have also found their way into the cryptocurrency space.
Key features of standard futures contracts include:
Expiration Date: The most significant difference between standard and perpetual futures is the expiration date. Standard futures have a set date when the contract expires, typically every quarter, depending on the asset. At this point, the contract must be settled, either by delivering the underlying asset or settling the position in cash.
Lower Funding Fees: Since standard futures have an expiration date, they do not require a funding rate mechanism like perpetual futures. This can be a significant advantage for traders who want to avoid the unpredictability of funding fees, which fluctuate based on market conditions.
Predictability: Some traders prefer the structured nature of standard futures, as the expiration date provides a clear timeline for closing positions. This can make it easier to plan trades and reduce the temptation to hold onto a position indefinitely, which might occur with perpetual futures.
Volatility Near Expiration: As the expiration date approaches, standard futures contracts often experience increased volatility, especially in the final hours of trading. This can provide opportunities for traders but also increases risk. In contrast, perpetual futures tend to have more consistent pricing due to the continuous funding rate mechanism.
Pros and Cons of Each
Perpetual Futures
Pros:
- No need to worry about an expiration date.
- Flexible holding period, ideal for long-term positions.
- More liquidity and tighter spreads.
- Popular among short-term and day traders.
Cons:
- Funding rates can add up over time, especially in volatile markets.
- Higher risk of holding losing positions indefinitely.
- Leverage can lead to quick liquidation.
Standard Futures
Pros:
- No funding fees, offering more cost predictability.
- Expiration dates force you to close positions, reducing emotional decision-making.
- Better suited for long-term investors looking to hold positions until the contract’s expiration.
Cons:
- The expiration date adds pressure to close trades, regardless of market conditions.
- Less liquidity compared to perpetual futures.
- Potential for increased volatility near expiration.
Trading Strategies: Which One Should You Choose?
The choice between perpetual and standard futures depends largely on your trading goals, risk tolerance, and time horizon. If you’re a short-term trader or someone who enjoys the flexibility of holding positions for as long as you want, perpetual futures are probably the better choice. The liquidity and lack of an expiration date make them appealing for scalpers, day traders, and swing traders alike.
On the other hand, if you prefer more structure, don’t like the unpredictability of funding rates, and are comfortable working within a defined timeframe, then standard futures may be the better option. They’re especially useful for traders who like to plan trades around specific events or timelines and want to avoid the potential for funding fees to eat into their profits.
A Practical Example: Trading BTC on BingX
Let’s imagine you’re trading Bitcoin (BTC) on BingX. You have the option to enter either a perpetual or a standard futures contract.
Scenario 1: You enter a perpetual futures contract. You open a long position on BTC because you believe the price will rise over the next few weeks. Since there’s no expiration date, you can hold the position for as long as you want, assuming you maintain sufficient margin. However, after a week, the market turns bearish, and you start paying high funding fees to shorts. Eventually, you’re forced to close your position at a loss.
Scenario 2: You enter a standard futures contract. In this case, you choose a contract that expires in three months. You still open a long position, and for the first month, the market is in your favor. As the contract approaches expiration, you notice increased volatility, but you manage to close your position in profit before the contract settles. You didn’t have to worry about funding fees, but you did have to manage the pressure of the approaching expiration date.
Conclusion: Understanding the Differences for Smarter Trades
Whether you choose BingX standard futures or perpetual futures depends on how you want to manage risk, costs, and time. Perpetual futures offer flexibility and liquidity, but with the potential burden of funding fees. Standard futures, while more predictable in some ways, come with the challenge of fixed expiration dates and potential liquidity issues.
In the end, both types of futures contracts have their place in a well-rounded trading strategy. By understanding their unique features, you can make informed decisions that align with your financial goals and risk tolerance.
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