Perpetual Futures (Perps)
Understanding perpetual futures contracts and how they work in cryptocurrency trading
What are Perpetual Futures?
Simple Definition
Perpetual futures (often called "perps") are derivative contracts that let you bet on the future price of an asset (like Bitcoin) without the contract ever expiring. They're like traditional futures, but they never expire.
Key Difference from Regular Futures
Traditional futures contracts have an expiration date - you must settle or close them by that date. Perpetual futures never expire, so you can hold them as long as you want (or until you get liquidated).
Why They Exist
Perpetual futures were created to give traders the benefits of futures trading (leverage, going short) without the complexity of managing expiration dates. They're especially popular in crypto markets.
How Perpetual Futures Work
Open a Position
You decide to go long (bet price goes up) or short (bet price goes down) on an asset like Bitcoin. You deposit margin (collateral) to open the position.
Use Leverage
You can use leverage (e.g., 10x) to control a larger position than your margin. With $1,000 margin and 10x leverage, you control $10,000 worth of Bitcoin.
Funding Rate Payments
Every 8 hours, funding rate payments occur. If the perpetual price is above spot, longs pay shorts. If below, shorts pay longs. This keeps the price near the spot price.
Monitor Your Position
You watch your position's profit/loss. If price moves against you too much, you risk liquidation (automatic closure of your position).
Close Position
You can close your position anytime to realize your profit or loss. There's no expiration date forcing you to close.
Key Features of Perpetual Futures
Perpetual futures have unique features that make them different from other trading instruments. Click on any feature to learn more:
No Expiration Date
Perpetual futures contracts never expire, unlike traditional futures that have specific settlement dates
Funding Rate
A periodic payment between long and short positions that keeps the contract price close to the underlying asset price
Leverage
Ability to control a large position with a small amount of capital (margin)
Long and Short Positions
You can profit from both price increases (long) and price decreases (short)
Liquidation
If your position loses too much value, it gets automatically closed to prevent further losses
Mark Price
A reference price used to calculate unrealized P&L and prevent price manipulation
Perpetual Futures vs Traditional Futures
Understanding the differences helps you choose the right instrument for your trading strategy:
Funding Rate Explained
What is a Funding Rate?
The funding rate is a periodic payment (usually every 8 hours) between traders holding long positions and those holding short positions. It's designed to keep the perpetual futures price close to the spot price of the underlying asset.
How It Works
Scenario 1: Perpetual Price Above Spot
If Bitcoin perpetual is trading at $50,000 but spot Bitcoin is $49,000, the funding rate becomes positive. Longs pay shorts to incentivize more short positions, bringing the price down toward spot.
Scenario 2: Perpetual Price Below Spot
If Bitcoin perpetual is trading at $49,000 but spot Bitcoin is $50,000, the funding rate becomes negative. Shorts pay longs to incentivize more long positions, bringing the price up toward spot.
Why Funding Rates Matter
- Cost of holding: If funding rate is against you, you pay fees every 8 hours
- Price stability: Keeps perpetual price close to spot price
- Trading signal: High funding rates can indicate market sentiment
- Profit opportunity: You can earn funding payments if you're on the right side
Leverage in Perpetual Futures
What is Leverage?
Leverage allows you to control a larger position than your capital. It's like borrowing money to trade, but you use your margin as collateral.
How Leverage Works
Example with 10x Leverage:
- You deposit $1,000 as margin
- With 10x leverage, you control $10,000 worth of Bitcoin
- If Bitcoin goes up 10%, you make $1,000 (100% return on your $1,000)
- If Bitcoin goes down 10%, you lose $1,000 (100% loss - liquidation risk)
⚠️ Leverage is Dangerous
Higher leverage = higher risk. With 10x leverage, a 10% price move against you wipes out your entire position. With 100x leverage, just a 1% move can liquidate you. Most traders should use low leverage (2x-5x) or no leverage at all.
Risks of Trading Perpetual Futures
Perpetual futures are high-risk instruments. Understanding the risks is crucial. Click on any risk to learn how to mitigate it:
Liquidation Risk
If price moves against you, your position can be liquidated, losing your entire margin
Funding Rate Costs
If funding rate is against your position, you pay fees every 8 hours, which can add up
High Volatility
Crypto markets are extremely volatile - prices can move 10-20% in hours
Price Manipulation
Large traders can manipulate prices to trigger liquidations (liquidation cascades)
Technical Issues
Exchange outages, slippage, or system failures can cause unexpected losses
Emotional Trading
Leverage amplifies emotions - fear and greed can lead to poor decisions
Common Use Cases
📈 Speculation
Traders use perps to speculate on price movements with leverage, hoping to profit from both upward and downward price movements.
🛡️ Hedging
If you own Bitcoin but are worried about price drops, you can open a short perpetual position to hedge your exposure.
💰 Arbitrage
Traders look for price differences between perpetual futures and spot prices, or between different exchanges, to profit from the spread.
⚡ Quick Trades
The 24/7 nature and high liquidity make perps popular for day trading and short-term trading strategies.
📊 Market Making
Professional traders provide liquidity by taking both long and short positions, earning funding rate payments.
🎯 Portfolio Diversification
Some traders use perps to gain exposure to crypto markets without actually owning the underlying assets.
Important Considerations
⚠️ Not for Beginners
Perpetual futures are complex and risky. You should have a solid understanding of trading, leverage, and risk management before using them.
💰 Start Small
If you do trade perps, start with very small positions and low leverage. Learn how they work before risking significant capital.
📊 Understand Funding Rates
Always check the funding rate before opening a position. High funding rates can eat into your profits or amplify your losses.
🛑 Use Stop-Losses
Set stop-loss orders to limit your downside. Don't rely on manual monitoring - markets can move faster than you can react.
🏦 Choose Reputable Exchanges
Use well-established exchanges with good liquidity, security, and customer support. Avoid exchanges with a history of issues.
💸 Never Risk More Than You Can Afford to Lose
This is especially important with leveraged products. You can lose your entire margin (and potentially more) very quickly.
Key Takeaways
♾️ Never Expire
Perpetual futures contracts never expire, unlike traditional futures. You can hold them indefinitely (until liquidation or you close them).
💰 Funding Rate Mechanism
Funding rates keep perpetual prices close to spot prices through periodic payments between longs and shorts every 8 hours.
⚡ High Leverage Available
Perps offer high leverage (up to 100x+), which amplifies both profits and losses. Most traders should use low or no leverage.
⚠️ High Risk
Perpetual futures are extremely risky. Liquidation, funding rate costs, and volatility can lead to rapid losses. Not suitable for beginners.
📈 Long and Short
You can profit from both price increases (long) and price decreases (short), giving you flexibility in any market condition.
🎓 Education First
Before trading perps, thoroughly understand leverage, funding rates, liquidation, and risk management. Start with paper trading or very small positions.