The impact of spot prices on perpetual contract prices and the operational methods

As we all know, even for the same Token, the spot and perpetual contract prices can differ, and this difference can be quite significant over a period of time.

All contracts referred to below are perpetual contracts

For example, if you bought a Token in the spot market at 1 dollar and it rose to 2 dollars, what would be the price of the contract during this time? At this point, the contract transaction price, the mid-market price, or the executable price may still be around 1 dollar, clearly lower than the spot. This creates a price gap.

Let’s explain it with a specific case:

Assume the current spot price of $ABC is 1 dollar, and the contract price is also 1 dollar.

Suddenly, a market maker pumps the spot market, and within a short time, the spot price rises to 2 dollars, while the contract price remains at 1 dollar (or nearby).

Since the spot and the contract are two independently matched markets, with different depths, liquidity, market-making methods, and participating funds, even if the spot price is quickly driven up, the contract price may not necessarily follow suit. However, changes in the spot price will still gradually push the contract price closer to the spot price through arbitrage trades, market makers adjusting prices, index prices, and market expectations.

At this point, many folks would want to short $ABC at 2 dollars. Can they place a short order? It is clearly stated in the article that if the contract price is 1 dollar, then a short order at 2 dollars cannot be executed at that moment because there is no counterparty, so 2 dollars would just be an order on the books.

So, for friends at this time, there are three common ways to handle it:

1. You hold spot assets with a cost below 2 dollars

Operation: Sell spot and open a long contract position at 1 dollar.

The logic here is that either the spot falls, or the contract rises, or both converge towards the middle. So you make a profit on the spot, and the contract can still capture the upside potential. Of course, this is under normal circumstances; if the situation is abnormal, there might be a sudden drop which would lead to losses in your contract, but your spot would be profitable. The remaining factor is just the interest spread between the spot and the contract.

2. You do not have spot assets, but spot supports borrowing or leveraged short selling.

Operation: Borrow coins, short the spot at 2 dollars on the spot market, and go long at 1 dollar on the contract market.

This is the standard arbitrage process, but currently, it is not applicable since most controlled coins do not have a spot market, and secondly, if there is a strong pull in the future, it may take several days or even more for the price to return to a low point, and the borrowing interest might cut into the profits. Of course, you still have to repay the borrowed coins in the end.

3. You have neither spot nor can borrow spot

Operation: Simply open a long contract position at 1 dollar.

This situation is no longer considered arbitrage but is instead a bet that the contract price will align with the spot price, essentially a bet that the contract will rise.

Returning to the initial price gap between spot and contracts, you will find that as the spot price rises, the contract price also rises. The increase is not automatic but rather due to the presence of arbitrageurs (of course, there may be other reasons, but that's beyond the scope of this discussion), gradually aligning the prices of spot and contracts through arbitrage.

Of course, if the spot price is low and the contract price is high, that is also possible. This situation is quite common in perpetual markets, especially when market sentiment is extremely bullish, too many people are leveraged long, and the funding rate continues to rise, leading to significant discrepancies where the contract price is noticeably higher than the spot.

If that is the case, the standard arbitrage thinking would be reversed:

Buy cheap spot and short the high-priced contracts

Because the contract market naturally carries leverage, more speculative funds participate, and emotions can be amplified, thus whether it's above or below the spot, it's not surprising.

However, for ordinary users, upon seeing a huge price discrepancy between the spot and contracts, the first reaction shouldn't be "it's time to make money." The price gap may not last long, and even when it does, due to market maker interventions, the direction could be wrong for all sides.

Trading through price gaps during these conditions and surviving until that gap returns is quite difficult.

In summary:

Spot prices and perpetual contract prices will mutually influence each other but will not automatically align; rather, they gradually align through arbitrage, market making, market sentiment, and funding behaviors.

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