Perptual Futures' Complex Profit and Loss Mechanism: Hidden Risks and Operation Suggestions

Perptual Futures, as the main product in the crypto derivatives market, have a profit and loss calculation that is far more complex than it appears on the surface. This article will delve into the profit and loss algorithm of Perptual Futures, revealing the hidden risks within, and providing practical operational advice.

1. Profit and Loss Calculation Mechanism

Perptual Futures are divided into USDT margin ( forward ) contracts and coin margin ( inverse ) contracts.

1.1 USDT margin ( long ) contract

This type of contract uses stablecoins as margin and settlement currency, with profit and loss calculations exhibiting a linear relationship.

Unrealized Profit and Loss Calculation:

• Long: ( Mark Price - Average Opening Price ) × Position Size
• Short: ( average opening price - Mark price ) × Position size

Realized Profit and Loss Calculation: Realized P&L = ( closing price - average opening price) × closing quantity - fees - funding costs

It is important to note that various fees are calculated based on the notional value of the contract, and high leverage can significantly amplify the erosion of fees on the margin.

1.2 Coin-Margined Margin ( Inverse ) Contract

This type of contract uses cryptocurrency itself as margin and settlement currency, and the profit and loss calculation presents a nonlinear relationship.

Profit and Loss Calculation ( settled in coins ):

• Long: ( / Closing price - 1 / Opening price ) × Position size - Fees
• Short: (1/Opening Price - 1/Closing Price) × Position Size - Fees

This nonlinear structure creates asymmetric risk exposure for traders, with longs facing greater risk in a bear market and shorts facing greater risk in a bull market.

2. Implicit Risk Analysis

Mark Price vs. Last Trade Price

The exchange uses the mark price to calculate unrealized profits and losses and to trigger liquidation, while the trading execution is based on the latest transaction price. This dual price mechanism may lead to:

1. Unnecessary Stop Loss: The latest transaction price fluctuates momentarily to trigger the stop loss, while the marked price has not significantly changed.

2. Unexpected liquidation: The price drop on other exchanges pulls down the mark price, resulting in the liquidation of positions on this exchange.

2.2 funding fees

Funding fees are calculated based on the nominal value of the position, and under high leverage, they will continuously erode the margin. Even if the market is sideways, long-term positions may incur losses due to funding fees.

2.3 Chain Liquidation and Trading Slippage

Large leveraged positions being liquidated may trigger a chain reaction, resulting in significant slippage. This effect is more pronounced in illiquid markets.

2.4 Automatic Position Reduction ( ADL )

When the insurance fund is exhausted, the system will forcibly liquidate the most profitable reverse position to cover the losses. This means that even profitable traders may be forced to bear market risks.

3. Practical Case Analysis

Taking a BTCUSDT transaction as an example, demonstrating its lifecycle:

1. Opening Position: BTC price $60,000, opening a long position of 1 BTC with 20x leverage.

   • Nominal Value: $60,000
   • Initial Margin: $3,000
   • Maintenance Margin: $240
   • Estimated liquidation price: approximately $57,240

2. Profit Scenario: BTC rises to $65,000

   • Unrealized P&L:+$5,000
   • Funding Fee: -$6.50
   • Fee:-$62.50
   • Net realized P&L:$4,931

3. Loss Scenario: BTC drops to liquidation price

   • Position was forcibly liquidated
   • Loss of entire $3,000 initial margin

Conclusion and Recommendations

1. Fully understand the profit and loss calculation mechanism, and do not be misled by superficial floating profits.

2. Pay attention to the marking price rather than just looking at the latest transaction price.

3. Be cautious of the accumulation of various fees under high leverage.

4. Use limit stop-loss orders instead of market stop-loss orders to reduce slippage risk.

5. Avoid peak periods of funding fees and optimize the position structure.

6. Shorten the trading cycle in high volatility markets.

7. Choose a trading platform with good liquidity and transparent rules.

8. Maintain a sense of awe and manage risks well.

Perptual Futures are full of opportunities, but the risks are equally enormous. Only by fully understanding their operational mechanisms can one navigate this market with ease.