What Are Crypto Futures Contract’s Last Price and Mark Price?
In recent years, crypto derivatives have gained popularity among traders who want to gain exposure to the cryptocurrency market without directly owning digital assets. In January, derivatives volume surged by 76.1% from the previous month, reaching a whopping $2.04 trillion. This was the largest increase since January 2021, when volume rose by 114%. According to CryptoCompare data, derivatives trading now accounts for 70.3% of the entire crypto market, up from 68% in December.
However, it’s important for traders looking to jump on this trade bandwagon to understand its fundamental concepts and the key components; Mark Price, and Last Price. By better understanding these, traders can more successfully navigate the complex world of crypto derivatives trading. Let’s explore these key trading tools.
What Is the Last Price
In futures trading, the last price is the most recent transaction price of a particular contract. In simpler terms, the last trade executed for a specific contract determines its latest price. In other words, the Last Price is the latest traded price of the orderbook on a real-time basis
For perpetual contracts like BTCUSDT, the price is influenced by its underlying asset, which is Bitcoin. These contracts have their own supply and demand as traders buy and sell them on LBank Futures, creating a unique price for the BTCUSDT contract that may differ from Bitcoin’s spot price.
Over time, the last price of the futures contract may deviate from the actual price of the underlying asset traded in the spot market. This price inconsistency may worsen as the volume of the contract market increases.
To establish a more stable and reliable price structure for perpetual contracts, LBank Futures employs mark prices. By using an average of the latest prices from various spot exchanges, mark prices help reduce price fluctuations and ensure that the futures contract price remains close to the spot price of the underlying asset.
What Is Mark Price
In conventional futures trading, the position value is commonly marked as the most recent trading price. Nonetheless, this technique may result in unnecessary liquidation if the market is manipulated or lacks liquidity, resulting in significant fluctuations between the Mark Price and the corresponding Index Price.
To solve these challenges, LBank utilizes a fair price marking mechanism. This approach guarantees an equitable price by augmenting a diminishing funding basis rate to the underlying index price.
The mark price serves as a reference point for assessing the value of underlying cryptocurrency in a trade. It plays a crucial role in determining the unrealized profit and loss of a trade, giving traders a more precise understanding of its potential profitability.
The Mark Price is determined by the following formula: Mark Price = Index Price * (1 + Funding Rate basis rate), where the Funding Rate basis rate is calculated based on the current Funding Rate and the time interval from the current funding period to the funding cycle.
The Index Price serves as a crucial reference point for traders, representing the average market price of cryptocurrencies on LBank. It is also a key component in calculating the Mark Price.
The Mark Price is used to determine unrealized profit and loss (P&L) and can impact liquidation, but it has no effect on realized P&L, which is determined by the closing price. By using a fair price marking mechanism, LBank and other exchanges help ensure a more stable and transparent trading environment for their users.
Comparing Last Price and Mark Price
Although related, the last price and mark price serve distinct purposes and possess unique characteristics that differentiate them.
The last price refers to the most recent price at which a derivatives contract has been traded by investors. It reflects the current market price of the underlying asset in real-time, and is crucial for determining realized profit and loss. Continuously updated, it offers traders an up-to-date snapshot of prevailing market conditions.
In contrast, the mark price is an estimate of the true market value of the underlying asset. It is not a traded price, but rather a theoretical price that takes into account several market factors such as liquidity and trading volume. The mark price helps traders calculate unrealized profit and loss, enabling them to evaluate performance without waiting for their positions to be closed.
Wrapping Up
Understanding both the market price and last price are essential for successful trading of cryptocurrency derivatives. The last traded price is the latest price at which a derivative contract has been sold and is used to determine the realized profit and loss of a trade. Meanwhile, mark price serves as a benchmark for the value of underlying cryptocurrency and is used to calculate unrealized gain and loss.
To find out what the market price is, traders need to look at the order book and see what prices are available for them to trade. Traders can set TP/SL orders using either the last price or mark price as the trigger price, but it’s essential to understand the differences between them to assess the risk involved in trades.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.
