Crypto Futures contracts are considered derivatives, as their market price derives from an underlying asset. In traditional spot markets, actual assets are exchanged, while in futures markets, only contracts that represent those assets are traded. LBank offers a unique type of futures contract known as “perpetual futures contracts.” These futures contracts are a special type of futures contract that lacks a predefined settlement date. In other words, traders can hold these contracts indefinitely, given they meet certain minimum requirements. To understand perpetual futures contracts better, we’ll explore three fundamental concepts: initial and maintenance margin, liquidation, and the insurance fund.
Initial and Maintenance Margin
The initial margin represents the amount of cryptocurrency that a trader commits as collateral when opening a leveraged position. This collateral backs the position, and it’s essentially a security deposit to ensure that the trader can meet their obligations within the contract. The maintenance margin, on the other hand, is a dynamic value that changes based on the market price of the asset and the trader’s margin account balance.
Suppose Jay has 100 LBank exchange tokens (LBK) and uses them to purchase 1,000 LBK at 10x leverage. In this scenario, the initial margin is the 100 LBK she commits to back her position. However, to ensure her position remains open, Jay must maintain a balance in her margin account that exceeds the maintenance margin requirement. If her account balance drops below the maintenance margin level, she will either receive a margin call or be subject to liquidation.
A margin call typically asks the trader to add more funds to their account to bring their balance back up to the maintenance margin requirement. However, margin calls are relatively rare in the cryptocurrency space. Instead, most exchanges, including LBank, rely on a liquidation mechanism to address underfunded accounts.
Liquidation involves the forced closure of leveraged positions when the total value of the trader’s account falls below the maintenance margin requirement. This indicates that the collateral is insufficient to maintain the position. Liquidation can result in either a complete closure of all open positions, leaving the trader with a zero balance, or a partial liquidation, involving the reduction of open positions while liquidating some of the trader’s assets.
It’s worth noting that different trading platforms may have distinct mechanisms for handling perpetual futures contracts, so liquidation processes can vary.
The insurance fund is another crucial element of perpetual futures markets. It serves to prevent the balances of losing traders from dropping below zero and guarantees that winning traders receive their profits.
Imagine that Jay has $2,000 in her LBank Futures account. She uses her entire balance to open a 10x LBK long position at a cost of $20 per contract. It’s important to note that she is buying these contracts from other traders, not directly from LBank. Let’s say Sarah is on the other side of this trade, with an opposing short position of the same size.
Due to the leverage involved, Jay now holds a 1,000 LBK position valued at $20,000. However, if the price of LBK drops from $20 to $18, her position could be subject to liquidation. In the event of liquidation, all her open positions would be forcibly closed, and her $2,000 collateral would be lost. However, in some cases, the trading platform’s system may fail to close Jay’s positions on time, leading to a potential issue.
This is where the insurance fund comes into play. The insurance fund acts as a safeguard against unexpected and abnormal market conditions. In this scenario, it would be activated to cover the losses generated by Jay’s positions, which couldn’t be closed promptly. The system would use funds from the insurance fund to close Jay’s positions, ensuring that the losses don’t impact the balance of other traders negatively.
Contract Specifications of Perpetual Futures Contracts
Perpetual contracts on LBank Futures differ from inverse contracts in that they adhere to transparent pricing rules and are settled in USDT.
Here are the specific contract specifications:
Overall, LBank Futures contract specifications provide a comprehensive framework that outlines essential details, including tick size, quantity, expiry, margin rate, liquidation fee, leverage and settlement dates, and various critical parameters that buyers and sellers must have a clear understanding of.
Perpetual futures contracts offer traders the flexibility to hold positions for an extended period, provided they meet the necessary margin requirements. These contracts involve initial and maintenance margins, liquidation mechanisms, and an insurance fund to mitigate potential risks. Traders should be aware of certain contract specifications when using the perpetual futures trading on platforms like LBank. While these contracts provide unique opportunities for profit, they also come with increased risk, and it’s essential to understand how they work before participating in the market.
Disclaimer: Derivatives are often volatile, and this can be a risky investment. The information provided in this article is solely for educational purposes and shouldn’t be regarded as financial advice.