Things About Perpetual Futures You Need To Know

We have discussed futures contracts in the previous article. In this article, we will talk about something similar but different with futures contracts. Some of you might have heard about perpetual futures, and wondering what it is? You might be also wondering if perpetual futures is haram or halal. So now, let’s move into the next paragraph to read more about this type of contract.

 

What is a futures contract?

Before we jump into the explanation of perpetual futures, what is a futures contract? A futures contract is an agreement between two parties to buy or sell something at the predetermined date and agreed price. For example, you are planning to buy 1 Bitcoin for $100000. Then, both you and the seller agree to settle the contract next month. So, you have to pay the seller $100000 next month. On the other hand, the seller should deliver 1 Bitcoin that worth $100000 to you. If the price is increased at the settlement date, it will benefit the buyer. If the price is decreased, it will benefit the seller.

So, what is a perpetual futures contract?

First and foremost, let’s begin with its definition. Perpetual futures are similar to a futures contract but with no settlement date. As a result, the person can keep their long or short futures contract for as long as they like. The price of perpetual futures contracts is designed to always reflect the current price of the underlying asset because the contract can be settled at any time. Additionally, the trading of perpetual contracts is based on an underlying Index Price. Perpetual contracts, unlike traditional futures, are frequently traded at prices that are equal to or relatively similar to spot markets.

Secondly, as you know that a futures contract always has two parties contributed. One party guessing the price will be increased. On the other hand, the other party guessing the price will be decreased. So, with a perpetual futures contract, you will be able to gain profit not only when you guess the price will be increased but also when you guess the price will be decreased.

Thirdly, perpetual futures contract uses leverage. Leverage is a feature you can use to access the whole price with only having to pay a small amount of money. For example, Binance allows you to leverage your Bitcoin position up to 125 times your cash investment.

Is it halal or haram?

First and foremost, based on the vast majority of sharia scholars’ opinion that the futures contract is problematic in Islam. It permits someone to sell and buy things that do not exist when the contract is made. Of course, it is gharar (uncertainty).

Secondly, the other problem is the cash settlement. When the arrangement is finalized, there will only be an exchange of money. There is no exchange of underlying assets. Both parties will gain profit based on someone’s loss. Thus, based on this condition, maysir (speculation) takes place.

In conclusion, a perpetual futures contract contains gharar (uncertainty) because it allows us to sell something we do not own. It also contains maysir (speculation) since it is a zero-sum financial instrument that permits us to exchange something with no value.

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