Beginner’s Guide to Digital Perpetual Contract
I. Contract Description
Digital Perpetual Contract (Perpetual Contract) is an inverse contract in which the underlying asset is digital currency. To offer convenient trading experience, 58COIN has adjusted the corresponding contract size of each digital currency, please see the link below for details:
Note: The maker fee and the taker fee may adjust irregularly due to the platform activities. The specific information is subject to the official announcement.
II. Tips for Beginners
What is Digital Perpetual Contract (Perpetual Contract)?
Digital Perpetual Contract is a digital currency contract that uses the holding currency as both quotation unit and settlement unit. As opposed to Futures Contract, Perpetual Contract does not have an expiry and thus do not have a settlement. Currently, our Perpetual Contract supports two-direction contract trades including BTCUSD, EOSUSD, etc., and provides multiple leverages to allow the copying of the spot market under high leverage. This contract will not be settled and is able to follow the underlying reference Index Price by tethering mechanism.
(underlying reference fair price)
How to trade a Digital Perpetual Contract?
The underlying price of Perpetual Contract is the spot index of multiple top exchanges. For details, please refer to Index Price. All margins, profits, and losses are quoted in holding currency. The contract size is described in Contract Description.
The trader will long Perpetual Contract with the expectation that the digital currency/US dollar will rise in value. On the contrary, the trader will short Perpetual Contract if his expectation is that the price will drop.
Margin and Leverage:
All margins are calculated in holding currency. You can trade in two directions, go long or go short, on this currency contract.
We offer 2x, 3x, 5x, 10x, 20x, 33x, 50x and 100x leverage. You can choose a leverage when opening a position, however, this leverage cannot be adjusted after opening the position. (The leverage between multiple contracts is not affected by each other.)
A trader goes long 100 BTC of BTC at a price of 6,000 USD. He is long 100 BTC * 6,000 USD = 600,000 contracts. A few days later the price of the contract increases to 7,000 USD.
Profit will be: 600,000 * 1 * (1/6,000–1/7,000) = 14.286 BTC
If the price had in fact dropped to 5,000 USD, the trader’s loss would have been: 600,000 * 1 * (1/6,000–1/5,000) = -20 BTC. The loss is greater because of the inverse and non-linear nature of the contract.
Conversely, if the trader was short then the trader’s profit would be greater if the price moved down than the loss if it moved up.
Note: The price of digital currencies can be highly volatile. With the use of leverage, the risks and opportunities in trading digital currencies are both extremely outsized. For these reasons, traders should be cautious and aware.
Liquidation Price Mechanism
For the risk control of Perpetual Contract, 58COIN imposes liquidation price mechanism, the calculation of which is based on Index Price. When the price triggers liquidation price, a liquidation process will be initiated.
For all positions, the Maintenance Margin required = (MM * Contracts * Multiplier/ Opening Price).
This is the minimum amount of margin you must maintain to avoid liquidation on your position. Based on this value, we will calculate the liquidation price of the position.
Where MM (Maintenance Margin) = 0.5%
In order to avoid unnecessary liquidations, 58COIN will retain the existing positions and cancel all unexecuted orders on the current contract.
If this does not satisfy the maintenance margin requirement then the position will be taken over by the liquidation engine at the bankruptcy price.
If 58COIN is able to liquidate the position at better than the bankruptcy price, the additional funds will be added to the Insurance Fund.
If 58COIN is unable to liquidate the position at the bankruptcy price, we will spend the Insurance Funds on aggressing the position in the market in an attempt to close it. If this still does not close the liquidated order, this will then lead to an Auto-Deleveraging event.
You will be notified if a liquidation occurs.
Auto Deleveraging is targeted at the liquidation orders that cannot be executed after adding the Insurance Fund or the Insurance Fund is depleted.
According to market principles, you must trade with a counterparty. If the counterparty disappears (unavailable in the market), his positions in the market will reduce accordingly.
Note: Only positions of this contract are affected. Positions of other contracts will not be affected.
Auto-Deleveraging ranking: Deleveraging priority is calculated by profit and leverage. More profitable and higher leveraged traders are deleveraged first.
The ranking calculation is as follows:
Ranking = PNL Percentage * Effective Leverage (if PNL percentage > 0)
Ranking = PNL Percentage / Effective Leverage (if PNL percentage < 0)
Effective Leverage = abs(Mark Value) / (Mark Value — Bankrupt Value)
PNL percentage = (Mark Value — Avg Opening Value) / abs(Avg Opening Value)
Mark Value = Position Value at Mark Price
Bankrupt Value = Position Value at Bankruptcy Price
Avg Opening Value = Position Value at Average Opening Price
The system splits these positions by longs and shorts and ranks the positions from highest to lowest.
You will be notified if an Auto-Deleveraging occurs.
As market manipulation will trigger a liquidation chain-reaction, which may inflict unnecessary losses on users. 58COIN tethers to market price by tethering to index price. All PNL are dominated in fair underlying price instead of platform price.
Fair Mark Price: Fair Mark Price = Index Price * (1 + Funding Rate)
For the calculation of Funding Basis, please refer to tether to spot price
The transaction will be executed at the platform price. (The process of opening and closing the position, execution price will be generated only by trading with the counterparty on the platform.)
Marking for Unrealised PNL purpose is done according to the fair underlying price, so you can see your profit and loss immediately after opening a position (this is the result of a fair underlying price calculation). Since the liquidation is calculated at the fair underlying price (mark price), regardless of the volatile internal price of the platform, your Unrealised PNL will not change provided the mark price remains unchanged. This is to avoid “being liquidated”.
For example, currently, the platform price of BTCUSD contract is 7,000. The fair underlying price is 7,005. You can only trade with 7,000 when opening a position, but your Unrealised PNL will be calculated according to 7,005.
If the platform price changes to 6,000 for some reason, the fair underlying price remains 7,005 (there is no change), then your Unrealised PNL is still calculated according to 7,005, and will not be affected by the platform price change. However, if you close the position at this time, your execution price will be 6,000, because the price during the transaction must be generated with the real counterparty.
Tether to Spot Price — Funding
The underlying assets of Perpetual Contract are spot assets like BTC and other digital currencies. In order to keep the platform price close to the spot reference price, 58COIN uses Funding as spot price tethering mechanism.
58COIN does not charge any fees on funding; it is exchanged directly peer-to-peer.
The Funding Rate is comprised of two main parts: the Interest Rate and the Premium / Discount. Funding Interval = 3, since funding occurs every 8 hours at 08:00 (GMT +8), 16:00 (GMT +8), 24:00 (GMT +8).
The Funding Rate is comprised of two main parts: the Interest Rate and the Premium / Discount.
Interest Rate Component:
Every contract traded on 58COIN consists of two instruments: a Base currency and a Quote currency. The Interest Rate is a function of interest rates between these two currencies. The source borrow market is stated for each Interest Index.
Premium / Discount Component:
The perpetual contract may trade at a significant premium or discount to the Mark Price. In those situations, a Premium Index will be used to raise or lower the next Funding Rate to levels consistent with where the contract is trading.
Premium Index (P) = (Max(0, Impact Bid Price — Index Price) — Max(0, Index Price — Impact Ask Price)) / Index Price + Fair Basis
Final Funding Rate Calculation
The Funding Rate is next calculated with the 8-Hour Interest Rate Component and the 8-Hour Premium / Discount Component. A +/-0.05% dampener is added.
Funding Rate (F) = Premium Index (P) + clamp(Interest Rate (I) — Premium Index (P), 0.05%, -0.05%)
This calculated Funding Rate is then applied to a trader’s Position Value to determine the Funding Amount to be paid or received at the Funding Timestamp.
Funding Rate Caps
58COIN imposes caps on the Funding Rate to ensure the maximum leverage can still be utilized. To do this, two caps are imposed:
1. The absolute Funding Rate is capped at 75% of the Initial Margin — Maintenance Margin. If the Initial Margin is 1% and the Maintenance Margin is 0.5%, the maximum Funding Rate will be 75% * (1% — 0.5%)= 0.375%.
2. The Funding Rate may not change by more than 75% of the Maintenance Margin between Funding Intervals.
III. Term Reference
Two-Direction Trade: Traders can buy to open (or open position), that is, start a trade by buying a contract; or sell to open, which means, start a trade by selling a contract.
Margin: This Margin refers to contract margin. It is the act of paying a certain percentage of the contract’s value as a performance bond to conduct a trade several times the margin.
Unrealised PNL: Profit and loss in the holding position, in this case, profit is not available.
Contract Size: The minimum value of a transaction, calculated according to “Contract”, currently 1 Contract = 1 USD.
Tick Size: A tick size is the minimum price movement of a contract in the open outcry process of the exchange. In the transaction, each tick value must be an integral multiple of each one tick movement.
Maintenance Margin: It refers to the minimum amount needed to keep the position from getting liquidated.
Mark Price: Mark Price = Index Price * (1 + Funding Rate). It is used as a standard for profit & loss (PNL).
Market Price: A request to execute a buy or sell transaction at the best available price in the current market. It is widely considered the fastest and most reliable way to enter or exit a trade and provides the most likely method of getting in or out of a trade quickly.
Opening Price: The opening price is the price at which a contract first trades upon the opening of a position.
Index Price: The index tracks the spot price, which is taken from Bitfinex, Bitstamp, GDAX and other top exchanges, and represents the overall price level of the market.
Limit Price: An order placed to execute a buy or sell transaction at a specified limit price or better.
Position Value: The number of holding contracts (amount of digital currency).
Trigger Order: Trigger order is a trading instruction with pre-defined parameters (trigger price and execution price) by a user. When the last traded price has reached the trigger price, 58COIN will send an order to the market at the execution price. Trigger order may not necessarily be executed.
Available Balance: Funds that can be used to open new positions and transferring out, in which margin is excluded.
Equity: All of the user’s funds, including available balance and margin.
Insurance Fund: 58COIN uses an Insurance Fund to avoid Auto-Deleveraging in traders’ positions. The fund is used to aggress unfilled liquidation orders before they are taken over by the auto-deleveraging system. The Insurance Fund grows from liquidations that were able to be executed in the market at a price better than the bankruptcy price of that particular position.