Perpetual futures are one of the most popular derivatives in the crypto world. Unlike traditional futures contracts, they don’t have an expiration date, which means traders can hold their position as long as they want if they manage their margin correctly.
But how do perpetual futures work? Why are they especially common in crypto trading? And what risks should you watch for before diving in?
This guide breaks it all down in simple terms, from funding rates and leverage to margin requirements and trading platforms. Whether you’re a beginner or just looking to sharpen your knowledge, this article will help you better understand the mechanics behind perpetual futures.
Key Takeaways
- Perpetual futures are futures contracts with no expiration date, commonly used in crypto markets like Bitcoin and Ethereum.
- They rely on a funding rate mechanism to keep their prices aligned with the spot market instead of using expiration-based settlement.
- Leverage allows traders to control larger positions with less capital, but it also increases the risk of liquidation.
What Are Perpetual Futures?
Perpetual futures are a type of derivative contract that allow traders to speculate on the price of an asset without owning it. Like traditional futures, these contracts let you go long (bet on price going up) or short (bet on price going down).
What makes perpetuals unique is that they don’t expire. A traditional futures contract settles on a specific date, but a perpetual contract can be held indefinitely as long as the trader maintains enough margin to keep the position open.
Because of this structure, perpetual futures are especially popular in crypto trading, where traders often want flexibility, high leverage, and round-the-clock access.
How Perpetual Futures Work
Perpetual futures mimic the structure of standard futures but replace the expiration and settlement process with a funding rate mechanism. This keeps the contract price close to the spot price of the asset.
Here’s a breakdown of how perpetual contracts function:
- Mark Price: This is a fair-value price based on a combination of spot prices and funding rates. It’s used to determine unrealized P&L and trigger liquidations.
- Last Price: This is the actual traded price of the perpetual contract on the exchange.
- Funding Payments: These are periodic payments between long and short traders, designed to reduce the gap between the perpetual contract and the underlying spot market.
Instead of settling monthly or quarterly like traditional futures, perpetual futures stay open continuously, with the funding rate ensuring that prices don’t drift too far from the real market.
The Role of Funding Rates
The funding rate is what allows perpetual futures to function without expiration.
What is a Funding Rate?
A funding rate is a periodic payment exchanged between traders based on their position and the difference between the perpetual price and spot price.
- If the perpetual price is higher than spot, longs pay shorts.
- If the perpetual price is lower than spot, shorts pay longs.
Why Funding Rates Matter
These payments incentivize traders to take the other side of the market, which helps pull the perpetual price back toward the spot price. This mechanism keeps the system balanced and avoids extreme price divergence.
Funding Frequency
Most exchanges calculate and settle funding every 8 hours, but this varies by exchange. Traders only pay or receive funding if they are holding a position at the time of the funding snapshot.
Example
If BTC perpetual contracts are trading at $80,500 while spot BTC is at $80,000, the funding rate might turn positive, meaning long positions will pay a small percentage (e.g., 0.01%) to short positions every 8 hours until prices converge.
Perpetual Futures vs Traditional Futures
While perpetual futures and traditional futures may sound similar, they operate very differently, especially in how they manage pricing, expiration, and risk.
1. Expiration Dates
Traditional futures have a set expiration date. When that date arrives, the contract settles either physically or in cash. Perpetual futures, on the other hand, have no expiration. You can hold the position as long as you maintain enough margin to support it.
2. Settlement and Price Convergence
With traditional futures, the contract price naturally converges with the spot price as the expiration date nears. That’s how the market closes the gap between futures and spot. Perpetuals use the funding rate to do this instead.
3. Rollover Requirements
Since traditional contracts expire, traders who want to maintain their position need to “roll” into the next contract before expiration. This means closing out the current contract and opening a new one. Perpetual futures don’t require this, which simplifies long-term holding.
4. Asset Class Usage
Perpetuals are mainly used in crypto markets. You’ll find them for Bitcoin, Ethereum, and other altcoins. Traditional futures, by contrast, are widely used across commodities (like oil and gold), stock indexes (like the S&P 500), interest rates, currencies, and more.
5. Trading Hours and Leverage
Perpetual futures trade 24/7 to match crypto market hours. Traditional futures usually follow exchange trading sessions (e.g., CME hours). Perpetuals also tend to offer much higher leverage (sometimes up to 100), whereas traditional brokers limit leverage to lower levels for risk control.
Both types of contracts have their uses, but perpetual futures are clearly designed with fast-moving, high-leverage, round-the-clock crypto trading in mind.
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Why Perpetual Futures Are Popular in Crypto Markets
Perpetuals dominate crypto derivatives for a few simple reasons:
- 24/7 Market Access: Since crypto never sleeps, traders prefer contracts that also trade around the clock.
- No Expiration Hassle: There’s no need to roll over contracts or worry about settlement.
- High Leverage: Spot crypto exchanges often offer up to 100x leverage, which appeals to speculative traders (though risky, as it greatly magnifies profits and losses).
- Deep Liquidity: BTC and ETH perpetuals have massive open interest and daily volume.
- Better Price Tracking: The funding rate system helps keep prices close to the spot price, even in volatile markets.
As a result, perpetual futures are the go-to product for active crypto traders.
Leverage and Margin in Perpetual Futures
What is Leverage?
Leverage allows you to control a larger position than your account balance. For example, with 10x leverage, $100 in margin lets you control a $1,000 position.
Margin Requirements
In traditional futures, there are two types of margin to know:
- Initial Margin: The minimum required to open a position.
- Maintenance Margin: The minimum you must keep to avoid liquidation.
If your position drops below the maintenance margin level, your position may be closed automatically to prevent further losses.
Example
Let’s say you open a 10x leveraged long position on ETH/USDT at $2,000 with $210 (the initial margin requirement).
- Your position size is $2,000.
- If the maintenance margin is 10%, a 11% drop in ETH’s price would result in a full liquidation (an 11% move would result in a loss of $220, which is greater than the maintenance margin requirement of $200).
Leverage can boost profits, but it also magnifies losses. Use it with caution.
Risks of Trading Perpetual Futures
Perpetual contracts offer flexibility and speed, but they also come with real risks:
- Liquidation Risk: Using high leverage means even small price moves can wipe out your position.
- Volatility: Crypto prices move fast. Sharp swings can lead to margin calls or forced liquidation.
- Funding Rate Uncertainty: Constantly paying high funding rates can eat into profits.
- Exchange/Platform Risk: Centralized spot exchanges may experience outages, liquidations, or, in rare cases, insolvency.
- Emotional Trading: The speed and leverage can tempt traders to chase losses or overtrade.
That’s why it’s critical to set stop losses, use proper position sizing, and trade with a clear plan.
How to Trade Perpetual Futures
Here’s a basic walkthrough of how to start trading perpetuals:
- Choose a Platform: Binance, Bybit, OKX, and Kraken are some of the top exchanges.
- Fund Your Account: Most platforms require transferring USDT or another stablecoin to your futures wallet.
- Pick a Contract: Choose from BTC/USDT, ETH/USDT, or other available perpetual contracts.
- Set Leverage: Adjust the leverage multiplier according to your risk tolerance.
- Enter Your Trade: Go long or short, depending on your market outlook.
- Manage Risk: Use stop losses and monitor your funding payments.
Start with small positions and low leverage until you understand how the system works.
Important Note on Perpetuals:
Perpetual contracts are mostly available on crypto exchanges that operate outside U.S. regulations. If you’re based in the U.S. or prefer exchange-traded, CFTC-regulated futures, consider trading CME contracts on MetroTrade.
Popular Perpetual Futures Contracts
The most heavily traded perpetual contracts are based on major cryptocurrencies. Here are a few of the top ones:
1. BTC/USDT Perpetual
This is the flagship contract on most exchanges. It allows you to speculate on Bitcoin’s price using USDT as the settlement currency. It typically has the deepest liquidity, tightest spreads, and highest open interest of any perpetual product. Funding rates are closely watched, and trading volume is highest during U.S. and Asia market hours.
2. ETH/USDT Perpetual
Ethereum’s perpetual contract works similarly to BTC/USDT. Traders use it to go long or short on ETH without owning the asset. It’s also highly liquid and often sees significant volatility during major Ethereum-related news events or upgrades.
3. SOL/USDT, XRP/USDT, DOGE/USDT, and other altcoins
Many top exchanges now offer perpetuals on a wide range of altcoins. These contracts often have wider spreads and lower liquidity than BTC or ETH, but they can be more volatile, attracting short-term traders looking for big moves. Each altcoin has its own risk profile, and funding rates can swing more wildly due to speculative interest.
When choosing a perpetual contract, always look at liquidity, volatility, and funding rate history. High volume contracts like BTC and ETH offer smoother execution, while smaller coins may involve more slippage.
Tips for Beginners
If you’re new to perpetual futures, keep these tips in mind:
- Use a Demo Account: Practice without risking real money.
- Start Small: Trade with low leverage and small amounts.
- Understand Funding Rates: Don’t get caught off guard by funding payments.
- Watch the Market: Be aware of news and major events that can cause volatility.
- Avoid Overtrading: Stick to a trading plan and take breaks.
Perpetual Futures on Decentralized Platforms
Most perpetual futures are traded on centralized exchanges like Binance, Bybit, or OKX. But in recent years, there’s been a major push to bring perpetuals to the DeFi (decentralized finance) space, giving traders more control and transparency.
What Are Decentralized Perpetuals?
Decentralized perpetual futures work much like their centralized counterparts, but they run on smart contracts instead of centralized order books. You connect your crypto wallet (like MetaMask), fund it with stablecoins like USDC or USDT, and trade directly from your wallet, no exchange custody required.
Advantages of Decentralized Perpetuals
- Self-custody: You keep control of your funds at all times.
- Transparency: Smart contracts are public and auditable.
- Permissionless access: No account sign-ups or KYC needed.
Limitations to Consider
- Higher Fees: Especially when interacting with Ethereum-based protocols (due to gas costs).
- Slippage: Some platforms have lower liquidity or use AMMs instead of order books, which can result in less favorable pricing.
- Complexity: Interfaces can be confusing to new traders, and understanding funding models on decentralized platforms may take time.
Despite these trade-offs, decentralized perpetuals continue to grow, especially among traders who value self-custody, censorship resistance, or access from restricted jurisdictions. They represent the next phase of evolution in crypto derivatives trading.
Final Thoughts
Perpetual futures are a powerful tool for active traders, especially in the crypto space. Their flexibility, high leverage, and 24/7 access have made them the most widely used crypto derivatives in the world. But they aren’t risk-free.
Before trading perpetuals, make sure you understand how funding rates, leverage, and margin work. Always use a risk management plan, and never trade with more than you can afford to lose.
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FAQs
What is a perpetual futures contract?
A perpetual futures contract is a type of derivative that allows traders to speculate on an asset’s price without an expiration date. Unlike traditional futures, perpetual contracts remain open indefinitely and use a funding rate to keep prices close to the spot market.
How do perpetual futures work?
Perpetual futures work by mimicking traditional futures but without an expiry date. They use a funding rate mechanism (regular payments between long and short traders) to align the contract price with the spot price of the underlying asset.
What is a funding rate in perpetual futures?
The funding rate is a periodic fee paid between long and short traders on a perpetual contract. It helps keep the contract price close to the spot price. When the perpetual price is higher than the spot price, long positions typically pay short positions, and vice versa.
Do perpetual futures expire?
No, perpetual futures do not expire. Traders can hold positions indefinitely, as long as they maintain sufficient margin and meet funding payments. This makes perpetuals ideal for long-term or swing trading in crypto markets.
Are perpetual futures only used in crypto?
Perpetual futures are most commonly used in cryptocurrency markets. While the concept can apply to other asset classes, they are primarily offered on crypto trading platforms like Binance, Bybit, and dYdX.
Can you lose more than your initial margin in perpetual futures?
Yes, it is possible to lose more than your initial margin when trading perpetual futures, especially when using high leverage. Most platforms have auto-liquidation systems to prevent this, but extreme volatility can still result in larger-than-expected losses.
What’s the difference between perpetual futures and traditional futures?
The main difference is that perpetual futures have no expiration date and use funding rates to maintain price alignment. Traditional futures expire on a set date and settle at that time, usually without ongoing funding payments.
Is trading perpetual futures risky?
Yes, trading perpetual futures involves high risk. Price volatility, leverage, and funding rate fluctuations can all lead to significant losses. Exchanges and platforms that offer true perpetual futures currently operate outside the purview of US regulatory agencies. Traders should use small balances and proper risk management, such as stop loss orders and low leverage, especially when starting.
The content provided is for informational and educational purposes only and should not be considered trading, investment, tax, or legal advice. Futures trading involves substantial risk and is not suitable for every investor. Past performance is not indicative of future results. You should carefully consider whether trading is appropriate for your financial situation. Always consult with a licensed financial professional before making any trading decisions. MetroTrade is not liable for any losses or damages arising from the use of this content.