In the cryptocurrency market, perpetual contract trading and leverage trading are two common trading methods. Although both involve leverage, they are quite different. This article will explore the differences between perpetual contract trading and leverage trading to help you better understand them and make better trades in the cryptocurrency market.
1.Perpetual contract trading is a derivative trading method where the value of the financial instrument is based on the performance of an underlying asset. In the cryptocurrency market, derivative trading often involves using leverage to increase the efficiency of trades. Perpetual contract trading is a very popular derivative trading method as it allows traders to use up to 100x leverage, and has no expiry date.
In contrast, leverage trading involves borrowing funds to trade. Leverage traders can trade by depositing a small amount of funds into their account and borrowing more funds from the trading platform. By using leverage, traders can increase the value of their investment portfolio by borrowing funds and earn higher returns. However, leverage trading also increases the risk of traders as any losses will be amplified in proportion.
Therefore, the main difference between leverage trading and perpetual contract trading lies in the source of funds. In perpetual contract trading, traders use leveraged funds provided by the platform. In leverage trading, traders borrow funds to trade from the trading platform or other loan sources such as banks or individuals.
2.Another difference lies in the calculation of leverage ratio. In perpetual contract trading, the leverage ratio is set by the platform. Traders can choose their leverage ratio, usually between 2x to 100x. In leverage trading, the leverage ratio depends on the amount of funds borrowed by traders from the trading platform or other sources. The leverage ratio is usually between 2x to 10x.
Additionally, risk management in perpetual contract trading differs from leverage trading. In perpetual contract trading, the platform typically sets a forced liquidation price to limit traders' losses. When the price reaches that level, the position will be automatically closed. In leverage trading, the forced liquidation price is usually calculated based on the amount borrowed, whereas in perpetual contract trading, the forced liquidation price is usually calculated based on the maintenance margin rate specified in the contract.
3.There are also differences in trading fees between the two. In leveraged trading, borrowing fees and transaction fees are incurred. The borrowing fees start to accumulate when assets are borrowed and are generally charged on a daily basis. On the other hand, contract trading generally incurs fees only during the buying, selling, or settlement process, while perpetual contracts also generate funding fees. Additionally, leveraged trading charges fees based on spot trading rates, typically around 0.1%, whereas contract trading fees are usually around 0.02-0.05%.
The maintenance margin rate is the minimum ratio that must be maintained in the margin account, typically a decimal such as 0.5 or 0.75. When the margin ratio in the account falls below the maintenance margin rate, the exchange will issue a warning to traders to add margin in time to avoid being forced to liquidate. If the margin ratio in the account continues to decline and falls to the forced liquidation ratio specified by the exchange, the exchange will automatically force a liquidation operation.
In leverage trading, the forced liquidation price is determined by the leverage ratio and the current market price. Therefore, in high-leverage trading, the price fluctuations are significant, and the risk of forced liquidation increases accordingly. In perpetual contract trading, the forced liquidation risk is relatively small compared to leverage trading as it is related to the maintenance margin rate.
Overall, although perpetual contract trading and leverage trading have some similarities, there are also significant differences. When choosing a trading method, traders need to consider their trading strategy.