What Are Perpetual Futures? How Perpetuals Work in Crypto

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Perpetual futures (often called perpetual swaps or “perps”) are derivative contracts that let a trader take a long or short position on an asset’s price with no expiration date. A standard futures contract ends on a set date, and its price converges with spot as that date approaches. A perpetual contract never settles. Instead, a recurring payment called the funding rate passes between longs and shorts to keep the contract price anchored to the spot price of the underlying asset. Perpetuals are cash settled, so no one delivers or receives the asset itself. They are most closely associated with crypto trading on assets such as Bitcoin and Ether, though the same structure can be applied to commodities, indices and other assets.

How perpetual futures work

A perpetual futures contract tracks an underlying asset, for example BTC against the US dollar. Buying the contract (going long) profits if the price rises. Selling it (going short) profits if the price falls. The trader never owns the coin. Profit or loss is the change in the contract’s price multiplied by the position size, credited or debited to the margin account.

In a dated futures contract, expiry does the work of keeping the futures price honest. On the settlement date the contract is worth the spot price, so any gap between futures and spot has to close by then. Remove the expiry and nothing forces that convergence. If more traders want to be long than short, the perpetual could drift above spot and stay there.

The funding mechanism solves this. At set intervals, every open position either pays or receives a funding payment based on how far the perpetual price sits from spot:

• Perpetual trading above spot: funding is positive. Longs pay shorts. Holding a long becomes more expensive and holding a short becomes more rewarding, which encourages selling the perpetual and pushes its price back toward spot.
• Perpetual trading below spot: funding is negative. Shorts pay longs, which encourages buying the perpetual.

The wider the gap, the larger the funding payment tends to be, so the incentive to close the gap grows with it. Traders sometimes borrow contango (contract above spot) and backwardation (contract below spot) from dated futures to describe these two states.

Funding is a transfer between longs and shorts, so it does not change the exchange’s revenue, which comes from trading fees and other charges.

How the funding rate is calculated

Exact formulas differ by exchange, but they generally combine two parts:

1. A premium component that measures how far the perpetual price is from an index of spot prices. This is the part that reacts to market imbalance.
2. An interest component that reflects the difference in borrowing costs between the two assets in the pair (for BTC/USD, the cost of borrowing dollars versus borrowing bitcoin).

One construction looks like this:

Funding rate = Premium index + clamp(Interest rate − Premium index, −c, +c)

Here “clamp” limits the adjustment to a band of plus or minus c. When the premium is small, funding settles near the interest rate. When the premium is large, the premium dominates. Many venues also apply an overall cap and floor so funding cannot exceed a set maximum per period. The interval also varies: payments every eight hours (three times a day) are a frequent setup, but some venues use shorter or different intervals. The specific formula, cap and schedule are part of each exchange’s contract specification.

Funding is typically paid only by positions that are open at the moment the funding timestamp passes. A position opened and closed between two timestamps may pay or receive nothing, while a position held across many timestamps accumulates every payment.

Margin, leverage and liquidation

Perpetuals are margin products. To open a position, the trader posts initial margin, a fraction of the position’s notional value. Leverage is the ratio of notional to margin: $1,000 of margin supporting a $10,000 position is 10x leverage.

The account must then stay above the maintenance margin, a lower threshold. If losses push the account’s equity below it, the exchange closes the position automatically. That forced close is a liquidation, and it can happen during a brief price spike even if the market later moves back in the trader’s favor. Many venues trigger liquidation from a mark price derived from spot indices rather than from the last traded price, which reduces the chance that one thin trade wipes out positions. The liquidation trigger price and the price the position is actually closed at can differ in a fast market.

Contracts also come in two common margin styles. Linear (stablecoin-margined) contracts are collateralized and settled in a dollar-linked token, so profit and loss are measured in that token. Inverse (coin-margined) contracts use the underlying coin as collateral, so a trader’s margin itself rises and falls with the asset’s price.

Worked example: funding and leverage together

Setup (hypothetical figures): A trader opens a long BTC perpetual position with a notional value of $10,000 using $1,000 of margin (10x leverage). Assume funding is paid every eight hours and the rate holds at +0.01% per period.

Funding cost:

• Per period: $10,000 × 0.01% = $1, paid by the long to shorts.
• Per day (three periods): $3.
• Over 30 days, if rate and notional stayed constant: $90.

That $90 is 9% of the $1,000 margin, even though the rate looks tiny. Funding is charged on notional, so leverage scales its effect on the trader’s capital in the same way it scales price moves. Annualized under the same assumptions, 0.01% × 3 × 365 ≈ 10.95% of notional.

If the rate were −0.01% instead, the same long position would receive $1 per period, and a short of the same size would pay it.

Price moves:

• A 1% rise in BTC adds about $100 to the position, a 10% gain on margin.
• A 1% fall subtracts about $100, a 10% loss on margin.

Liquidation, roughly: Suppose maintenance margin is 0.5% of notional ($50). The account starts with $1,000 of equity and is liquidated when equity falls to about $50, a loss of roughly $950. That corresponds to a price drop of about 9.5%, ignoring fees, accumulated funding and the mark-price method. Higher leverage moves that threshold closer: at 20x, the same maintenance rate would leave room for only a move of a little over 4%.

How traders use perpetual futures

Directional speculation. The simplest use is a long or short bet on price. Because there is no expiry, a trader does not need to roll positions from one contract month to the next, and shorting is as straightforward as buying.

Hedging. A holder of the underlying asset can short perpetuals to offset price risk without selling the asset. Someone holding 1 BTC who shorts a perpetual position equal to 1 BTC is roughly price-neutral: a fall in the coin’s value is offset by a gain on the short. The hedge still carries funding. When funding is positive, the short receives payments. When it turns negative, the hedge costs money to maintain.

Arbitrage and basis trades. When the perpetual diverges from spot, traders buy in the cheaper market and sell in the more expensive one. The best-known version is the cash-and-carry trade: buy the asset on spot and short an equal amount of perpetuals, so price exposure largely cancels and the trader collects funding while it stays positive. Arbitrageurs selling an overpriced perpetual are part of what pulls it back toward spot. The trade carries exchange, margin and execution risks, including liquidation of the short leg during a sharp rally while the spot leg sits elsewhere.

Reading market positioning. Because funding responds to imbalance between longs and shorts, traders often watch funding rates alongside open interest as a rough gauge of how crowded one side of the market is. A positive rate shows that the perpetual has been trading above spot. It does not by itself show who is trading or why.

Where perpetual futures came from

The concept predates crypto. In a 1993 paper in The Journal of Finance, economist Robert Shiller proposed perpetual futures as a way to create a continuing, cash-settled claim tied to assets that are hard to trade directly, such as real estate, where an index could stand in for the underlying.

The idea took practical form in cryptocurrency markets around 2016, when BitMEX launched a Bitcoin perpetual swap that is widely credited as the first of its kind. Crypto suited the design: the market trades around the clock, no physical delivery infrastructure exists, and traders wanted leveraged exposure without managing expiring contracts. Perpetual contracts have since spread across many crypto exchanges, including decentralized venues that run the same funding logic on-chain.

Are perpetual futures regulated?

Regulation depends on the jurisdiction and on the venue offering the contract. In the United States, futures and swaps on commodities fall under the Commodity Futures Trading Commission (CFTC), and the CFTC has treated major cryptocurrencies such as Bitcoin as commodities. Platforms offering these derivatives to US customers are expected to operate within that framework. Many crypto exchanges that list perpetuals are based in other jurisdictions with different or lighter rules, and some restrict access by country. The practical questions for a trader are which entity they are contracting with, which regulator (if any) supervises it, and how client collateral is held if the platform fails.

Perpetual futures vs. related instruments

Perpetuals vs. dated futures. A standard futures contract has an expiry date and converges to spot at settlement, so holding exposure longer means rolling into the next contract. Its price can sit well above or below spot for months, reflecting interest rates and expectations up to expiry. A perpetual has no expiry and uses funding to push its gap toward zero period by period.

Perpetuals vs. spot. Buying spot means owning the asset: it can be withdrawn, transferred or held without margin calls, and there is no funding. A perpetual gives price exposure only, usually with leverage, with funding payments and liquidation risk attached.

Perpetual futures vs. perpetual swaps. These are two names for the same contract. “Swap” reflects the periodic exchange of payments between counterparties, and “perps” is the shorthand.

Perpetual futures vs. options. An options buyer pays a premium for a right, not an obligation, and maximum loss on a long option is that premium. A perpetual is a linear obligation: every price move flows straight into profit and loss. Perpetual options (sometimes called everlasting options) also lack expiry, but they keep the option payoff structure and use their own funding-style payments.

Limitations and risks

Leverage and liquidation. At 10x, a 10% adverse move can wipe out the position, and crypto prices can move that far quickly. Liquidation can lock in the loss during a temporary spike even if price recovers minutes later, and in fast markets the fill can be worse than the trigger level.

Funding is an ongoing, variable cost. It compounds across periods and can change sign and size without warning, turning a carry trade or a long-held hedge from income into cost.

Imperfect tracking. Funding pulls the perpetual toward spot but does not pin it there. During stress, the gap can widen, and the index used for mark price depends on the spot exchanges included in it.

Platform and counterparty risk. Contract specifications, funding formulas, margin rules and liquidation procedures are set by each venue. Offshore or lightly supervised platforms add questions about custody of collateral, dispute resolution and access to recourse if something goes wrong.

Perpetual futures give continuous, leveraged, two-way exposure to an asset’s price without expiry. Before opening a position, check the venue’s funding formula and interval, the margin and liquidation rules for the chosen leverage, and how the contract’s mark price is calculated.

The Bottom Line

Perpetual futures suit traders who want leveraged long or short exposure, hedges or basis trades without rolling expiring contracts. Funding payments add a variable cost that leverage magnifies, and liquidation can close a position during a brief spike. Before trading, a trader should check the venue's funding formula and interval, its margin and liquidation rules, how it calculates mark price, and which regulator, if any, supervises it.