No, it is to help you see the truth about 'overnight liquidation.'
In the cryptocurrency world, a day is like ten years in the human world. This phrase has led many to rush into the contract market with dreams of 'overnight success,' but ultimately became 'human fuel' for the exchanges. Today, I will tear off the glamorous facade of contracts in the most straightforward way, so you understand: you are focusing on opportunities, while the exchange is focused on your capital.
🎲 What is a perpetual contract? The 'immortal version' of futures.
The perpetual contract is essentially a betting agreement without an expiration date. It is like you and the market 'betting' on whether the future price will rise or fall. It's like a 'futures' sibling, but more exciting, with no 'expiration date' and the ability to keep betting indefinitely.
👉 Let me give you an example:
You predict the price of watermelon: you can 'go long' or 'go short'.
If you go long, you think the price of watermelon will rise from $1 to $2. You first 'agree' to buy at $1, and then sell when it rises to $2, earning a profit of $1.
If you want to short, you think the price of watermelon will drop from $1 to $0.5. You first borrow a watermelon, immediately sell it for $1, and wait to buy it back at $0.5 to return it. In this buy-sell cycle, you earn a profit of $0.5.
No matter whether the market goes up or down, you have a chance to make money as long as you guess the right direction.
Everyone knows spot trading; for example, a watermelon costs $10, and you have to pay $10 to buy one.
You can use 'leverage' in contracts. If you use 10x leverage, you only need to put $1 (this is called margin) to control $10 worth of watermelon!
😈 When making money: If the price of watermelon rises to $11 (a 10% increase), you earn $1 with a $1 principal, yielding a 100% return!
💀 When losing: If the price of watermelon drops to $9 (a 10% drop), your $1 principal will be completely wiped out (liquidation).
Leverage can make you earn quickly, but it can also lead to a quicker demise. It amplifies your profits but also magnifies your risks.
There is often a phenomenon called 'spike,' where the price suddenly drops down and comes back up, or suddenly spikes up and comes back down. Your principal is only at this level; as long as the price touches your liquidation price even for a moment, liquidation will happen instantly.
🧠 Three crucial survival concepts you must understand.
Contracts are divided into two models: one is full margin, and the other is isolated margin.
🛡️ Full margin means imagining your margin (principal) as all the money in your wallet; this way, your margin is larger, making it less likely to be liquidated. Because your capital is strong (all the money in your wallet is supporting it), you can withstand greater price fluctuations. For instance, if one position incurs a loss, the profits from other orders or the unused money in your wallet can be used to cover it, allowing you to hold out longer. But! If one blows, everything blows! If the market moves completely against you, leading to ultimate liquidation, then all the money in your entire contract account (your entire wallet) will be wiped out at once.
🎯 Isolated margin means you take a fixed amount of money (for example, $100) from your total wallet as the principal for a single betting round. Whether you win or lose this round, it only counts within this $100. Even if you perform poorly in this round and get liquidated, at most you only lose the $100 you took out. The other money in your wallet remains safe. The downside is that the principal is small, making it easy to get liquidated. If you only took out $100 to play, even a slight price movement in the opposite direction can lead to liquidation.
Another concept is the funding rate. The funding rate is one of the most confusing concepts in perpetual contracts, but its core logic is quite simple.
Imagine you are in a casino, at a 'bet on price up or down' table: those betting 'up' (bulls) sit on one side, and those betting 'down' (bears) sit on the other side. Normally, there should be about the same number of people on both sides, keeping the game balanced.
But suddenly, there is good news, and the vast majority rush to bet 'up'. At this moment, the casino owner notices a problem:
If the price keeps rising, those betting 'up' will earn wildly, while those betting 'down' will lose everything and leave. Over time, fewer people will play 'down' at the betting table, and this game will collapse.
What to do?
The casino owner thought of a way: he charged a 'balance fee' to the majority (those betting 'up') and then gave it to the minority (those betting 'down').
Why do this?
1. Encourage the weak: Give a subsidy to those betting 'down' to keep them from leaving and continue playing.
2. Remind the strong: Tell those betting on 'up': 'You are too enthusiastic; you need to calm down. Holding this direction has costs.'
This 'balance fee' is the 'funding rate' in the contract.
How does the funding rate work in contracts?
If there are far more people bullish (going long) than bearish (going short) in the market, then the bulls need to pay the bears. Conversely, if there are far more people bearish than bullish, then the bears need to pay the bulls. Usually settled every 8 hours (for example, at 0:00, 8:00, and 16:00 UTC).
How is the rate determined?
It is automatically calculated by a formula, mainly looking at the difference between contract prices and spot prices, as well as the ratio of bulls to bears in the market. You don’t have to calculate it yourself; the exchange will display it.
If the funding rate has been positive and high for a while, it indicates that the market is extremely enthusiastic, and everyone is going long; you need to be cautious as a correction might be coming. If the funding rate is negative, it means the market is very pessimistic, and everyone is going short, which could signal a rebound.
So next time you see the funding rate, just understand it as a 'market balance tax' or 'emotional overheating cooling fee'!
🚨 How to profit from it? If you still want to try, remember these 6 iron rules: surviving is more important than making money.
First, do not hold onto a position.
Holding onto positions is the first step that leads everyone to fail in the market. You think the market will come back; yes, it has returned a few times, but if it doesn't return that one time, it’s enough to reset your life. I've seen too many so-called veterans who, after 10 years, ended up with nothing after one market wave; they didn't fail because they didn't know how to trade, but because they couldn't bear to admit defeat. The result? They can never talk about trading again.
Remember, the market is not afraid of your stop loss; it fears your stubbornness. A stop loss is not cowardice; it's leaving yourself a lifeline.
Second, high-frequency trading.
Some people feel itchy if they don't place an order for a day; if the market doesn't move, their hands start moving first. You think you are trading, but in reality, you are looking for trouble. A true professional trader might make only a few trades in a day for short-term trading or just two or three trades in a week for long-term trading, but each time they are calculated down to the bone. The higher the frequency, the more mistakes accumulate, and in the end, it all comes down to emotional trading. To put it bluntly, it's not about losing money; it's about self-consumption. The market loves people like you who are so eager to trade.
Third, addiction to watching the market.
Watching the market every day is not diligence; it's anxiety. You think you are in control of the market, but in fact, you are being led by the market. Those who truly understand the rhythm set their stop losses and then turn off the screen; the market is not something you can stare into existence, and profits are not something you can will into being. The longer you stare, the more chaotic your emotions become, your hands shake more, and in the end, trading relies on impulse, not logic.
Fourth, always use reserve positions to manage risk.
Recommended main position: Reserve position should be allocated at 7:3 or 8:2, only adding to positions when there is a trend reversal or rebound signal, and not exceeding 1/3 of the reserve position each time. After making a profit, first fill up the reserve position and never use it to increase leverage. Having it as a safety net avoids a total liquidation in one go and helps maintain your mindset, allowing you to survive longer in the market.
Fifth, refuse high leverage.
High leverage is the number one culprit of liquidation in contracts! Avoid leverage above 10x. With 5x leverage, a 20% drop leads to liquidation; with 10x, only a 10% drop is needed to face liquidation. Surviving gives you a chance.
Sixth, technical analysis is the only reliance.
Fundamentals: Pay attention to interest rate cuts and policy trends (such as market movements after Trump's election).
Technical models: candlestick patterns (head and shoulders, box structures), indicators (MACD, moving average systems).
Position management: each trade's stop loss should not exceed 5% of the principal, and the profit-loss ratio should be at least 1:1.5.
Not long ago, the black swan event on October 11 caused an epic liquidation of $20 billion, affecting 1.6 million people.
The price of BTC dropped from $122,000 to a low of $102,000, with a maximum drop of over 16%; the price of ETH dropped from $4,340 to a low of $3,400, with a maximum drop of over 22%; mainstream coins like Solana (SOL) and XRP dropped close to 30%. Altcoins experiencing drops of over 90% is common. Among those who used leverage and engaged in contract trading, 98% faced liquidation. Many people who were showing off their profit screenshots the day before vanished the next day, not even updating their social media.
The cryptocurrency market is not short of opportunities; what it lacks are those who can survive longer.
Before you press the 'open position' button, ask yourself:
Are you controlling the contract, or is the contract controlling your greed?
Exchanges do not need to defeat you; they just need to wait for you to self-destruct.