Today, we will discuss an advanced trading tool, the inverse contracts, specifically Bybit inverse perpetual contracts. You will learn more about why this is the ideal tool for those who do not want to interact with fiat conversion and want to stay fully in cryptocurrency, especially if you are a professional crypto trader. However, you will also find out whether perpetual contracts are good and what you need to consider if you want to use them.
What Is an Inverse Contract?
First, let’s break down the basics and highlight the difference between a regular futures contract and an inverse contract. Typically, when dealing with futures contracts, even in cryptocurrency, you use fiat currencies like USD or stablecoins like USDT as the base currency. This means that all profits, potential losses, margins, and other calculations are paid in this base currency, not in the cryptocurrency.
An inverse contract works differently, using cryptocurrencies like BTC, ETH, and others as the base currency. Profits, margins, and other calculations are made in the same cryptocurrency, considering price fluctuations. Stable currencies like USD are used only as indicators to assess prices and calculate margins.
What Is Perpetual Inverse Swap Contract?
A Perpetual Inverse Swap Contract is an inverse contract that has no expiration date and allows positions to remain open indefinitely, using BTC, ETH, and other cryptocurrencies as the base currency for margin and other calculations.
Are Perpetual Contracts Good?
Perpetual Contracts, especially Perpetual Inverse Contracts, can be a great tool, but you need to consider their features.
Perpetual Inverse Contracts Pros
✅ No expiration date. It gives you greater flexibility and less pressure in terms of needing to close the contract, regardless of how successful the trade is.
✅ No conversion into fiat. It allows you to remain within the crypto ecosystem and minimize the impact of fiat exchange rates.
✅ High liquidity. Since cryptocurrencies like BTC and ETH are more volatile, you have more opportunities for profitable openings and closings of positions without worrying that the deal will significantly impact the price or experience a shortage of offers.
Perpetual Inverse Contracts Cons
❌ High risks. For example, if your base currency for calculation is BTC, you may lose not only from the trade but also due to a decrease in the value of BTC itself.
❌ High liquidation risk during volatility. If volatility is extremely high and price fluctuations are too significant, this increases the risk of position liquidation, even if you had a good strategy and did not manage to make a profit.
What Is Perpetual Trading in Bybit?
Bybit is one of the leading platforms in the crypto industry alongside Binance. However, in addition to classic financial instruments, it is known for its advanced derivatives, including Inverse Contracts and Perpetual Inverse Contracts.
Let’s take a look at Bitcoin US dollar perpetual inverse swap contract on Bybit:
Trader A buys 10,000 contracts at a BTC price of $23,000. The equivalent amount of BTC for this sum is approximately 10,000 / 23,000 ≈ 0.435 BTC.
When the BTC price rises to $25,000, Trader A closes all positions. He buys back the contract for $10,000 and sells the equivalent amount of BTC, which is 10,000 / 25,000 = 0.4 BTC.
As a result, Trader A makes a profit of 0.435 − 0.4 = 0.035 BTC (excluding trading and financial fees).
Bybit Trading and Funding Fees for Inverse Contracts
You also need to consider that Bybit charges certain fees in the case of Inverse Contracts, namely the Trading Fee and Funding Fee.
You can find a full guide and updates on the Trading Fee here. However the following conditions apply, as well as a separate Settlement Fee:
- Taker Fee Rate: 0.055%
- Maker Fee Rate: 0.02%
Trading Fee = Order Value × Trading Fee Rate
Order Value = Quantity / Executed Price
Settlement Fee = Order Value × Settlement Fee Rate, where Order Value = (Contract Quantity / Execution Price).
You can find a full guide and updates on the Funding Fee here, but the basic conditions for inverse contracts are that it is a regular fee charged or paid twice a day, where long position holders need to pay a 0.01% funding rate to short position holders.
Funding Fee = Position Value × Funding Rate
Position Value = Contract Quantity / Mark Price
Features of Inverse Perpetual Contract on Bybit
- Currencies: BTCUSD, ETHUSD, BITUSD, and others
- Expiration Date: Contracts have no expiration date
- Type: Settlement is made in the base currency, such as BTC, ETH, or BIT, while the contract size is specified in USD
- Minimum Order Size: $1 USD per contract
- Position Mode: One-way mode
- Order Placement: Orders are placed by quantity
Profit and Loss (P&L) Calculation for Inverse Perpetual Contracts on Bybit
Bybit provides very detailed guidance on calculations, and we strongly recommend reviewing it thoroughly and checking for updates. However, let’s discuss what you need to consider regarding calculations when it comes to Inverse Perpetual Contracts.
Average Entry Price (AEP)
For example, if Trader A has an open buy position of 1,000 contracts at $5,000 and then adds another 2,000 contracts at $6,000, the calculation would be as follows:
Total contract quantity = 1,000 + 2,000 = 3,000
Total contract value in BTC = (1,000 / 5,000) + (2,000 / 6,000) = 0.53333334 BTC
Average entry price = 3,000 / 0.53333334 BTC = $5,625
Unrealized P&L
Long position:
Unrealized P&L = Contract Quantity × [(1 / Average Entry Price) – (1 / Last Traded Price)]
Short position:
Unrealized P&L = Contract Quantity × [(1 / Last Traded Price) – (1 / Average Entry Price)]
Unrealized P&L %
It is calculated as the unrealized P&L divided by the position margin multiplied by 100%.
Realized P&L
Long position:
Realized P&L = Contract Quantity × [(Exit Price) – (Average Entry Price)]
Short position:
Realized P&L = Contract Quantity × [(Average Entry Price) – (Exit Price)]
Conclusion
Inverse contracts and perpetual inverse contracts are advanced financial instruments that allow you to stay fully in the crypto ecosystem, have more trading opportunities and open positions indefinitely.
However, you should keep in mind that advanced instruments require a lot of knowledge and skill to use them safely and really capitalize on the benefits they can offer to experienced traders.
Bybit Inverse Contracts and Perpetual Inverse Contracts is one of the best places you can find this, from quality guides to favorable terms and rewards, and the platform’s focus on advanced features and derivatives trading.
