What Are Perpetual Futures, and How Do They Work?

If you’ve spent any time trading crypto, you’ve probably come across derivatives — tools that help traders manage risk, bet on price moves, or increase their gains. Out of all the options out there, one type of contract has become a go-to for both beginners and pros.

In fact, perpetual futures contracts now make up around 93% of all crypto derivatives trading. It’s not hard to see why. With no expiry date and non-stop trading, they give traders more freedom and flexibility than traditional futures.

Key Takeaways

• Perpetual futures enable traders to speculate on asset prices indefinitely, as they have no expiration date.

• Perpetual futures offer high liquidity and 24/7 trading, especially in crypto markets.

• They use a funding rate mechanism to keep contract prices in line with the spot market.

Perpetual Contract Meaning

A perpetual future (or perpetual contract) is a type of derivative that lets you trade the price of an asset without owning the asset itself. It works like a regular futures contract but with one key difference — it never expires.

In traditional futures, contracts have an end date, which implies that when the date comes, the contract settles. You either get the asset or settle in cash. Perpetual futures skip that part, letting a trader hold the position as long as their margin allows it.

These contracts are especially popular in crypto markets. Platforms like Binance, Bybit, and KuCoin made them standard tools for crypto traders. They’re now a big part of daily crypto trading volume.

Perpetual futures follow the spot price of the asset, meaning they try to stay close to the current market price. To make that possible, they use something called the funding rate — we’ll cover that later.

These contracts support leverage. That means you can trade with more money than you actually have. It also means higher risk — if the price moves against you, your position can get liquidated fast.

In short:

• No expiration

• Track the spot price

• Use leverage

• Popular in crypto trading

Key Components of a Perpetual Futures Contract

Perpetual futures have the components that make up the contract. Each of these components affects how you trade and how much risk you're taking on.

Underlying Asset

This is the asset you're trading — like Bitcoin, Ethereum, or another crypto. You're not buying the asset itself but a contract that follows its price when trading perpetual futures.

Leverage

Leverage lets you control a large position with a small amount of money. For example, with 10x leverage, $100 lets you trade $1,000 worth of contracts. However, leverage cuts both ways — profits are bigger, but losses are faster.

Margin Requirements

You need a margin to open and keep a position:

• Initial Margin is the amount required to open the trade.

• Maintenance Margin is the minimum you need to avoid liquidation.

If your account balance drops below the maintenance margin, the platform will close your position to limit further losses.

Mark Price vs. Last Price

Last Price is the most recent trade price. Mark Price is a calculated price based on the index and funding rate. It prevents unfair liquidations during price spikes.

Liquidations use the mark price, not the last traded price.

Liquidation Mechanism

If the market moves against your position and your margin falls below the required level, your position is liquidated — automatically closed. You lost the margin you posted for that trade.

Liquidations are brutal in high-leverage trading. A small price move can wipe you out if you trade with high leverage.

Auto-Deleveraging (ADL)

Sometimes the system can’t fully liquidate a position, especially in low-liquidity markets. If that happens, the platform reduces the risk by automatically closing opposing positions of other traders. This is called auto-deleveraging.

The Funding Rate Mechanism

Perpetual futures contracts don’t expire like traditional futures. This creates a problem: without an expiry and settlement date, the price of a future contract can drift away from the price of the actual asset, called the spot price. To fix this, exchanges use the funding rate.

What is the Funding Rate?

The funding rate is a recurring payment exchanged directly between traders who are long (buyers) and short (sellers) on a contract. It happens at regular intervals — usually every 8 hours. The direction of payment depends on the price relationship between the perpetual contract and the spot market:

• If the perpetual contract is trading above the spot price, long traders pay short traders.

• If it’s trading below, shorts pay longs.

The funding rate exists to incentivise traders to balance the market and keep the perpetual price in line with the spot price.

Why Is This Necessary?

Since perpetual contracts never settle like traditional futures, there’s no natural moment where prices reset. That’s why the funding rate was created — to keep the contract price anchored to reality.

If no funding rate existed, the contract price could drift far away from the actual asset value, breaking the point of trading it in the first place.

Perpetual Futures Funding in Action

Let’s say you go long on a BTC perpetual futures example at $30,500.

• The spot price of BTC is $30,000.

• The market is bullish — lots of traders are long.

• Funding rate is +0.03% (positive).

That means every 8 hours, you pay 0.03% of your position size to traders holding short positions. If you’re holding a $10,000 position, you pay $3 every 8 hours just to stay in the trade.

If the price keeps going up, you might still make a profit — but if it stays flat or drops, those funding payments eat into your gains or increase your losses.

Why It Matters to You as a Trader

In short, the funding rate directly affects your P&L (profit and loss) over time.

• Even if the price doesn’t move, you could lose money from paying funding.

• Or you could make money from collecting it.

If you hold a position for multiple funding intervals (especially overnight or for days), the cost or reward adds up. For high-leverage positions, funding costs can significantly impact your net result, especially if the funding rate is unusually high.

Advantages of Trading Perpetual Futures

Perpetual futures are popular for a reason. They offer flexibility, leverage, and access to markets that regular spot trading doesn’t. Here’s why traders use them:

• They Don't Expire

Unlike regular futures with deadlines, you can keep your perpetual trade open for as long as you manage your margin and funding for days, weeks, or even longer. This gives you breathing room to plan your trades without worrying about a forced closing date.

• Trade Anytime, Usually Easily

Most major crypto exchanges offer perpetual futures with deep liquidity and around-the-clock trading. This means tighter spreads, faster order execution, and the ability to enter or exit trades anytime, including weekends and holidays.

• Leverage

Perpetuals let you trade with leverage, sometimes up to 100 times your money or more. This allows you to control a larger position with less capital, aiming for bigger potential profits. Be warned: Leverage dramatically increases risk; you could lose your stake much faster. It demands respect and careful management.

• Easily Bet on Falling Prices

Perpetuals make "going short" straightforward. This is often much simpler than trying to short assets directly, making it a useful tool if you predict a downturn or want to protect other investments.

• Protect Your Investments (Hedging)

Perpetuals are useful for hedging, reducing risk on assets you already own. For instance, if you hold Bitcoin but fear a price drop, shorting a Bitcoin perpetual can help offset potential losses on your coins without needing to sell them.

Risks and Challenges

Perpetual futures offer great possibilities, but diving in without knowing the dangers is asking for trouble.

• Leverage Wipes You Out Faster

Yes, leverage can boost wins, but it makes losses much bigger, much faster. A small price move against you can erase a huge slice of your money if you're using high leverage. Tiny market hiccups can liquidate your entire stake in seconds.

• Getting Liquidated

If a trade goes badly against you, the exchange can forcibly close it. This is liquidation. Your position disappears, and so does the money you put up for it. It's automatic and instant, often faster than you can react unless you set up safety nets like stop-losses beforehand.

• Funding Rate Impact

Depending on the market, you might have to pay a fee every few hours just to hold your trade open. Even if the price isn't moving against you, these regular payments can drain your account or wipe out small profits.

• Wild Market Swings

Many perpetuals are for crypto, and the crypto market is known for high volatility. Sudden spikes or crashes are common here. With leverage, these quick moves can cause instant liquidations.

• Emotional and Psychological Pressure

Watching your money fluctuate wildly with leverage is stressful. It’s easy to panic-sell at the bottom or make reckless trades trying to recover losses. Trading based on fear or greed, instead of a clear plan, almost always ends badly.

• The Exchange Itself Can Fail

Exchanges can have technical glitches, shut down for maintenance at bad times, or, in rare cases, even go bankrupt. Most aren't regulated like your bank, so the protections for your money might be different or non-existent.

Strategies for Perpetual Futures Trading 

Perpetual futures offer various trading approaches based on your goals and risk tolerance. Here are common strategies and how to use them.

Scalping

Scalpers aim to profit from tiny price moves by opening and closing trades within seconds or minutes. This strategy requires fast execution, tight spreads, and often high leverage to make those small moves worth it. It’s intense and high-stress, but it works for traders who thrive on speed and precision.

Day Trading

Here, traders open and close positions within the same day to avoid overnight risks. They typically use technical indicators, volume analysis, and market news to predict where the price will go over the next few hours. Since crypto markets run 24/7, crypto day traders can work around the clock, but most focus on high-volume hours when price movements are strongest.

Swing Trading

Swing traders hold positions for days or even weeks, trying to catch larger trends. This strategy requires more patience and often combines technical and fundamental analysis. One challenge here is the funding rate — if you're holding a position too long, that fee can eat into your profits.

Hedging

Consider this scenario: you own Bitcoin and want to protect yourself against a short-term price drop. You can open a short position in a BTC perpetual futures contract. If the price drops, your short gains offset the losses from your spot holdings. This strategy is common among long-term holders and institutions who want downside protection without selling their assets.

No matter what strategy you choose, risk management is not optional.

• Use stop-losses to limit damage

• Set take-profit levels to lock gains

• Control leverage — just because you can 50x doesn’t mean you should

• Never risk your whole account on one trade

Conclusion

Perpetual futures are flexible trading tools that let you go long or short on an asset without owning it. They don’t expire, track the spot price using a funding rate, and support leverage.

They’re useful for short-term speculation, long-term hedging, and everything in between. But they also come with real risks, especially if you don’t manage leverage or understand funding mechanics.