Inverse Perpetual Contracts Explained | Best Exchanges

Ever wondered what the difference was between USDT Perpetuals and Inverse Perpetuals when trading on your favorite exchange like Bybit or Binance? 

This guide helps you better understand the differences, advantages and risks to help you choose how to trade crypto futures.

What Are Inverse Perpetual Contracts?

Inverse perpetual contracts let traders speculate on crypto price movements without expiry. Unlike standard USDT perpetuals, inverse contracts are quoted in USD but settle entirely in crypto assets such as Bitcoin (BTC) or Ethereum (ETH).

Their defining feature is the inverse payout structure: as crypto prices rise, your profits per dollar shrink in crypto terms. Conversely, falling prices mean each dollar lost costs more crypto units. 

For example, going long 1 BTC at $70,000 and closing at $71,000 nets roughly 0.01408 BTC ($1,000 ÷ $71,000). But if the price drops to $69,000, your loss expands to about 0.01449 BTC ($1,000 ÷ $69,000).

Inverse vs USDT Perpetual Contracts Explained

Inverse perpetuals dominated crypto derivatives during BitMEX’s peak but have since given way to USDT perpetual contracts, driven by the stablecoin boom. Today, traders overwhelmingly favor USDT (or alternatives like USDC on exchanges like Hyperliquid) due to their stable collateral.

Here’s an in-depth breakdown of how inverse and USDT perpetuals differ, and why these differences matter to your trading strategy:

Linear vs. Inverse Payoffs

USDT perpetual contracts have linear payoffs, making profits and losses straightforward to track, as each dollar price movement directly translates into consistent USDT gains or losses. 

In contrast, inverse perpetuals pay out profits in crypto, meaning as prices increase, the number of crypto units earned per dollar decreases.

Collateral Stability

Collateral values in USDT perpetuals remain stable due to their direct link to the US dollar, protecting traders from crypto market volatility. Inverse perpetual contracts, however, expose traders to continual fluctuations in crypto prices, creating ongoing collateral uncertainty.

Market Exposure

Inverse perpetual traders carry collateral risk even without open positions because their margin is crypto-based. USDT perpetual traders mainly manage position-specific risks, though they must consider minimal stablecoin peg risk.

Pros and Cons of Inverse Perpetuals

Inverse perpetual contracts can be powerful tools for the experienced crypto trader, but they’re not without their quirks. Here’s a balanced view of why traders might choose or avoid them:

Pros

• Maintain Pure Crypto Exposure: Trades settle entirely in Bitcoin or Ethereum, removing the need for fiat or stablecoins. Ideal if you're bullish and want continuous exposure without converting assets.
• No Expiry Pressure: Keep trades open indefinitely, adjusting your strategy freely as market conditions shift.‍
• Efficient Hedging Strategy: Protect your portfolio from market downturns without selling into stablecoins, preserving exposure for potential recoveries.
• Possible Tax Benefits: Using crypto directly as collateral might help minimize taxable events compared to converting assets into stablecoins or fiat.

Cons

• Collateral Volatility Risks: Using crypto as collateral exposes your margin to price fluctuations. Sharp downturns can significantly erode margin and amplify losses.
• Less Intuitive Payoffs: The inverse payoff structure can complicate profit and loss calculations, making it harder to quickly assess potential gains or losses compared to stablecoin-based perpetuals.
• Funding Rate Costs: Funding payments occur every eight hours, creating extra costs that can erode profits during sideways or volatile market conditions.

Guide to Trading Inverse Perpetuals on Bybit

Trading inverse perpetual contracts on Bybit is straightforward once you know the process. Here's exactly how to open your first position:

1. Fund Your Derivatives Account: Transfer the asset you want to use as collateral (e.g. BTC) from your Funding Wallet to your Unified Trading Account on Bybit.
2. Select Trading Pair: Go to the "Derivatives" tab, and choose your inverse perpetual contract, like BTC/USD.
3. Set Order and Leverage: Pick your order type (Market or Limit), input your trade size in USD, and set your leverage using the dropdown tab that we’ve highlighted with a red box.‍
4. Confirm and Execute: Verify your position details, including margin required and liquidation price, and click "Buy/Long" or "Sell/Short" to confirm.
5. Monitor Your Trade: Regularly track your open positions under the "Positions" tab, manage your risk, and adjust or close trades as needed.

Understanding the Fees for Inverse Perpetuals

Trading inverse perpetuals comes with two main costs traders should fully understand: trading fees and funding rates.

Trading Fees

These are charged each time you enter or exit a position. Typical costs range between 0.025% maker rebates (for providing liquidity) and up to 0.075% taker fees (for removing liquidity), varying by exchange and order type. Selecting exchanges with lower fees or utilizing maker orders can significantly trim overall trading expenses.

Funding Rates

Funding rates keep perpetual contract prices in sync with the spot market, adjusted roughly every eight hours. If perpetual prices run higher than spot, longs pay shorts, if lower, shorts pay longs. 

Funding typically hovers around ±0.01% per interval, but it can spike dramatically during market volatility, impacting profitability significantly. Smart traders closely monitor funding schedules to avoid unexpected erosion of profits.

Top Inverse Perpetual Trading Platforms

Picking the right exchange for inverse perpetual contracts comes down to liquidity, leverage flexibility, and trading fees. Here are three top choices traders rely on:

• Bybit – Best Overall: Bybit leads with deep liquidity, low fees (0.02% maker, 0.06% taker), and leverage up to 100x. Traders can settle inverse contracts in BTC, ETH, XRP, EOS, and SOL, with over 1,700 crypto pairs supported.
• Binance – Institutional Grade: Binance is ideal for institutions, offering strong liquidity, leverage up to 100x, and competitive fees (0.02% maker, 0.06% taker). Supported inverse perpetual collateral includes BTC, ETH, BNB, ADA, XRP, and others, covering more than 300 crypto pairs.
• MEXC – Highest Leverage: MEXC offers unmatched leverage of up to 200x alongside competitive trading fees (0.02% maker, 0.06% taker). It supports BTC, ETH, LTC, XRP, EOS, and over 700 additional altcoin pairs.

Bottom Line

Inverse perpetual contracts are a valuable tool if you prefer to maintain exposure entirely within crypto assets like BTC or ETH. They can serve as effective hedges and align with long-term crypto strategies, but their complexity and collateral volatility require careful risk management. 

Before diving in, clearly assess your risk tolerance, familiarize yourself with funding costs, and choose exchanges like Bybit or Binance that offer reliability and competitive fees.