Foundations · Lesson 4 · Beginner
Spot vs futures and perpetuals
You know the difference between spot, futures and perpetuals and where liquidation is possible.
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Spot
With spot you buy the coin and own it. Your maximum loss is your stake, and there is no liquidation.
Futures and perpetuals
Futures are contracts derived from the underlying, usually with leverage. Perpetual futures are open-ended leveraged contracts with no expiry date, the most common type in crypto daytrading.
Spot, futures and perpetuals compared
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Test yourself
With which product can you not be liquidated?
- Perpetual futures
- Spot
- Futures with 10x
What is the most common contract type in crypto daytrading?
- Quarterly futures with expiry
- Perpetual futures with no expiry
- Spot
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The key points at a glance
- With spot you own the coin and cannot be liquidated.
- Perpetual futures are open-ended leveraged contracts, the most common type in crypto daytrading.
Deep dive
Where liquidation really threatens
In spot you own the coin, your maximum loss is your stake, and there is no forced closure. Futures and perpetuals are leveraged contracts, and it is exactly the leverage that brings liquidation risk.
- Below the maintenance margin, the exchange closes automatically.
- Perpetuals liquidate against an aggregated mark price.
- Socialized losses: residual losses can be passed on to profitable traders.
How a perpetual stays tied to the spot price
A classic future expires on a date, a perpetual has none and is still meant to stay close to spot. The mechanism is the funding rate, a payment between longs and shorts, typically every 8 hours.
- Perp above spot: longs pay shorts.
- Perp below spot: shorts pay longs.
- Through funding, the perp is tethered to spot.
ROE is not the price move
The displayed percentage gain is usually the return on equity, meaning profit on your margin, not the raw price move. The two numbers differ by the leverage, and the magnification works in both directions with full force.
- A 5 percent price move at 10x leverage is around 50 percent ROE.
- 5 percent against you means around 50 percent of your margin gone.
- Triple-digit ROE figures are only real if you exit in time.
Why sitting it out is deadly with futures
In spot, sitting tight is a strategy, the coin still belongs to you. With leverage it isn't: Murphy nails it, buy-and-hold does not work with leverage, sitting still is no strategy.
- A move against you consumes the margin all the way to liquidation.
- On the overheated side you pay funding continuously.
- In a long sideways phase this holding fee becomes brutal.
Sources: Goodman, Murphy
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