What are the risks of trading perpetuals?
Customers have the option to trade perpetuals using leverage. This means that the capital required to trade a perpetual is significantly less than the total notional value of the underlying asset. However, this also means that the customer may lose all of this funding capital should the market move against them. Therefore, trading perpetual contracts presents a liquidation risk.
In order to maintain the integrity of the derivatives platform, users of perpetuals are subject to an auto-liquidation feature. This means their positions will be automatically closed once the risk of the position is too high compared to the funds available to support it. Cryptocurrencies are volatile and leverage will amplify this volatility, meaning losses can be quickly accumulated.
Perpetuals are specific to a platform and cannot be moved or traded on another exchange - positions have to be closed on the platform.
Key Risks of trading perpetuals:
Market Risk (Price Volatility):
Cryptoassets are inherently volatile, and perpetual futures further amplify this risk due to the use of leverage. Prices can swing sharply and unpredictably, influenced by factors such as investor sentiment, regulatory changes, global economic trends, and potential market manipulation.
Risk Disclosure: Cryptoasset prices are highly volatile and may result in sudden and significant losses. Leveraged positions in perpetual futures amplify this volatility, increasing the likelihood of rapid losses. Investors may lose more than their initial margin. This product is not suitable for all investors.
Leverage Risk:
Perpetual futures allow users to take on positions much larger than their initial collateral through leverage. While this can magnify potential gains, it also significantly increases the risk of losses, especially during adverse market movements. Even small price drops can lead to the liquidation of positions.
Risk Disclosure: Using leverage increases your exposure to the underlying cryptoasset, and even small adverse price movements can result in the liquidation of your position. You may lose all your collateral and, depending on the platform, may be liable for additional losses.
Liquidity Risk:
Crypto markets can sometimes experience low liquidity, particularly during periods of market stress or extreme volatility. This can lead to slippage or difficulty in exiting a position at a desirable price.
Risk Disclosure: Market liquidity may deteriorate rapidly during periods of volatility. This could prevent you from closing your position at the expected price, potentially increasing losses.
Counterparty / Custodial Risk:
When trading perpetual futures on centralized platforms, users are exposed to the risk of platform failure, including insolvency, hacks, or operational malfunctions. Funds may not be protected or segregated.
Risk Disclosure: When trading perpetual futures via a centralized platform, you are exposed to the solvency, operational, and security risks of that platform. Your funds may not be segregated or protected under deposit guarantee schemes.
Liquidation Risk:
Most exchanges use automated systems to liquidate positions when margin requirements are no longer met. If the market moves rapidly against your position, this can result in full or partial liquidation without any manual intervention.
Risk Disclosure: You may be liquidated automatically if your margin balance falls below maintenance requirements. This can occur even during brief price spikes, and partial liquidations may occur at unfavorable prices.
Funding Rate Fluctuations:
Perpetual futures contracts use a funding rate mechanism to keep their prices aligned with spot markets. These funding rates fluctuate and can introduce additional costs or income, affecting long-term profitability.
Risk Disclosure: Funding rates may vary over time and create additional costs or credits, depending on market conditions. These charges can significantly impact your position profitability, particularly over longer holding periods.
