Recently, many people still have some misunderstandings about perpetual contracts, especially not fully understanding how they differ from traditional futures. I'll discuss this from a trader's perspective.

Traditional futures contracts have a fatal flaw — they must be settled at expiration. For example, if you buy gold futures, at the contract's expiration, physical delivery of gold must occur according to the terms, which means incurring storage costs. Additionally, as the delivery date approaches, the difference between spot prices and futures prices can grow larger, increasing your holding costs.

Perpetual contracts are completely different. They have no expiration date and do not require physical delivery of assets. This means you can hold a position indefinitely as long as your margin is sufficient. Sounds pretty great, right? Indeed, this gives traders higher leverage and greater flexibility. But it’s a double-edged sword — without an expiration date, counterparty risk is higher, and these financial instruments are usually less strictly regulated.

So how do perpetual contracts ensure that prices don’t go haywire? The answer is the funding rate mechanism. When the contract price deviates from the underlying asset price, long and short positions settle funding payments between each other. For example, if the contract price is higher than Bitcoin’s spot price, longs pay shorts, which incentivizes selling the contract, eventually bringing the price back to a reasonable level. This mechanism is executed every eight hours, ensuring that perpetual contract prices stay aligned with the actual value of the underlying asset.

In practical trading, the biggest advantage of perpetual contracts is that you don’t need to frequently roll over positions. Traditional futures require continuous expiry and renewal, but perpetual contracts do not. You can use them to hedge risks or for speculative trading, depending entirely on your strategy. Plus, since there’s no delivery, they are especially suitable for high-leverage trading.

But I have to be honest — perpetual contracts also have obvious disadvantages. First, these products are indeed very risky, especially under high leverage. Second, because they are not always under the oversight of certain regulatory agencies, if a default occurs, investors might not be protected. So, before participating in perpetual contract trading, you must conduct thorough risk assessments and due diligence.

Overall, perpetual contracts give traders more freedom and flexibility, but at the cost of higher risk. If you are an experienced trader, perpetual contracts can be a useful tool; but if you’re a beginner, it’s best to start with basic spot trading and only consider perpetual contracts after gaining enough experience.