There is a saying that 'bull markets often experience spikes'. According to Coinglass data, as of December 24, 2024, Bitcoin's total liquidation amount in December was about 1.5 billion USD, and the total liquidation amount in the cryptocurrency market could exceed 5 billion USD, making December likely one of the months with the highest liquidation scale this year.

If you are someone who jumped into the market when Bitcoin broke the 100,000 mark, only to find that you are lagging behind in entry, and can't help but want to amplify your returns with contracts, this article will introduce the win rate of retail investors in the contract market, who your opponents are when playing contracts, what hidden costs there are in opening contracts, why holding spot is better than contracts in a bull market, and what key points to pay attention to if you insist on opening contracts!

What is a cryptocurrency contract: A double-edged sword of capital amplification.

First, it is recommended to read: Cryptocurrency Contract Education, Can You Make Money in Bull and Bear Markets? The article provides a very clear explanation of various types of contracts and actual operating methods.

In simple terms, cryptocurrency contracts are a type of derivative financial instrument that allows investors to buy and sell expectations on price increases or decreases through 'contracts', rather than directly purchasing the cryptocurrency itself, profiting from the price fluctuations.

The main characteristic of contract trading is the ability to leverage capital. Traders only need to pay a certain percentage of margin to operate larger-scale trades. For example, if the leverage multiplier is 10 times, you only need to invest 10% of the capital to open a position, with a maximum leverage of 125 times.

In other words, if you only have 1,000 in principal, opening a position with 10 times leverage allows you to have a position size of 10,000, while 125 times leverage gives you a position size of 125,000. It sounds appealing and feels like you can earn faster, right?

In fact, losses can accumulate quite quickly! It can even lead to your principal reaching zero!

How much the contract rises or falls to trigger liquidation: How to calculate the liquidation price.

If you do not know how to calculate the liquidation price, please do not open a contract. Even though most exchanges will indicate the forced liquidation price, everyone planning to open a contract should at least understand this principle; otherwise, it is hard to imagine why liquidation occurs with just a slight rise or fall.

The liquidation price is a data point that everyone needs to calculate carefully before opening a contract; this price determines whether your funds will be forcibly liquidated and completely confiscated in market fluctuations.

The calculation of the closing price depends on your leverage multiplier and how much margin you have. Your leverage multiplier is closely related to the speed of your liquidation. Specifically, the formula is:

・Long contract: Liquidation price = Opening price × (1 - 1/Leverage multiplier)

・Short contract: Liquidation price = Opening price × (1 + 1/Leverage multiplier)

Taking the 30 times leverage that many contract players love to use as an example, opening a position with Bitcoin at 95,000:

・Long contract (long position) liquidation price: 91,833.65 USD

・Short contract (empty position) liquidation price: 98,166.35 USD

At 30 times leverage, the price only needs to change by about 3.33% to trigger liquidation. The higher the leverage, the narrower the price fluctuation range, and as soon as there is a slight reverse fluctuation in the market, it may lead to liquidation. This is why liquidation can be said to be common in highly volatile bull markets.

Contracts are a zero-sum game that benefits the exchange: Who exactly is making money?

In addition to the fact that higher leverage makes liquidation easier, do you know how the money in contracts flows?

I believe that for most people, their understanding of contracts is as follows:

・Going long: Profiting from the price increase.

・Going short: Profiting from the price decrease.

As for where the money earned comes from? Many people intuitively think that this money is what the exchange loses to the winning users.

But in reality, the profit from contracts comes directly from the losses of the counterpart. Only in certain extreme market conditions will it come from the liquidity provided by the exchange. Contracts are essentially a battleground where long and short investors are competing against each other.

You might think that the contract market is a clash between retail investors and slightly more experienced ones, but in reality, the contract market is not just retail investors; there are also whales, market makers, and institutional-level investment units. Your opponents may have sufficient capital to influence the outcome of the contract market by manipulating the spot market prices.

Due to the built-in leverage nature of contract trading, the chances of winning or losing when opening a contract are actually closely related to the trader's experience and market conditions. Some statistics show that retail investors have a long-term profit rate of only about 6% to 10% in high-leverage contract trading. This is already a relatively optimistic figure!

Many people think that contracts are just guessing high or low, so the chances of winning are 50/50, but in fact, data tells you that to profit through contracts, you must at least be confident of winning against 90% or even 95% of your opponents.

Hidden traps of contracts: Transaction fees and funding rates are factors that affect returns.

In trading contracts in the cryptocurrency market, in addition to the unbearable risks that may arise from excessive leverage, and the risk of being forcibly liquidated due to extreme market fluctuations, there are actually many hidden costs that might not have been noticed at first.

・Transaction fees: Each time you open and close a position, you need to pay transaction fees, especially in frequent trading or with higher leverage, these fees can quickly erode profits. In particular, the fees that Takers have to bear are usually higher than those of Makers.

・Funding rate: The funding rate is a dynamic cost of perpetual contracts used to balance the demand from both long and short sides. If the contract you are holding is opposite to the current market direction, you will need to pay a higher fee. Additionally, since the funding rate is charged every 8 hours, the longer the holding time, the higher the cost.

・Margin maintenance fee: Some exchanges charge additional margin maintenance fees, and during periods of market volatility, these fees may further compress investors' profit margins.

Taking opening a contract on Binance as an example:

If today I have 1,000 USD invested in Bitcoin contracts without liquidation, and the funding rate remains at a neutral 0.01%, how much will my principal be eroded by transaction fees and funding rates over these ten days?

In the case of a capital of 1,000 USD, 10 times leverage, and a holding period of 10 days:

・Funding rate cost 30 USD + transaction fee cost 4 USD = Total loss of about 34 USD, equivalent to 3.4% of the principal.

You might think that opening a position is just a matter of clicking a few seconds, but if it is a high-volatility market, or if you are going against the market trend, the funding rate will not just be this data; the accumulation over eight hours can be quite considerable.