What Are Perpetual Contracts (Perpetual Futures)?
A perpetual contract is one of the most traded products in crypto. It lets you bet on a coin going up or down, with leverage, and it has no end date. Understanding how it works is the first step for any futures strategy, arbitrage included.
Futures with an expiry date and perpetual futures
A traditional futures contract has an expiration date. On the agreed date it is settled and its price converges to the spot price of the coin. A perpetual doesn't expire: you can keep the position open as long as you like, as long as you have margin.
The lack of an expiry creates a problem: what keeps the perpetual's price from drifting away from the real price of the coin? The answer is the funding rate, a periodic payment between buyers and sellers.
How funding keeps the price aligned
When the perpetual trades above the spot price, funding is usually positive: longs pay shorts. That discourages buying and encourages selling, pushing the price back. When it trades below, the opposite happens.
That is why funding exists, and it's where the gain from funding arbitrage comes from. More details in what the funding rate is.
Important characteristics
- Leverage: you control a position larger than the capital you deposited. See what leverage is.
- Margin: the amount set aside to support the position, in isolated or cross mode.
- Liquidation: if the loss eats up the margin, the exchange force-closes the position.
- Buy and sell: you can profit both when the price rises (long) and when it falls (short).
Perpetuals and arbitrage
Because a perpetual lets you go short without owning the coin, it's the ideal tool for building two opposite positions on different exchanges. One long, one short, for the same amount. The price moves offset each other and the funding is what's left.
Each leg has its own liquidation price. Even when hedged, the trade can be hurt if the price moves a lot against one of them. See how to avoid liquidation.
A simple example
You believe BTC will go up and open a $1,000 long on a perpetual contract, with 5x leverage, using $200 of margin. If BTC rises 3%, the position gains about $30. If it falls 3%, it loses about $30. While you keep the position open, you pay or receive funding at each interval.
If funding is positive, you, as a long, pay. On days of high enthusiasm, that cost can add up. It's one of the reasons trading a direction for a long time gets expensive.
Perpetual, spot and dated futures: a summary
| Spot | Dated futures | Perpetual | |
|---|---|---|---|
| You own the coin | Yes | No | No |
| Leverage | No | Yes | Yes |
| Expiry | No | Yes | No |
| Funding | No | No | Yes |
| Can go short | Only by borrowing | Yes | Yes |
Related guide: what the funding rate is. See also all the crypto arbitrage guides.
Frequently asked questions
Are perpetuals and futures the same thing?
They are similar, but a traditional future has an expiry date and a perpetual doesn't. The perpetual uses the funding rate to keep its price close to the price of the coin.
Who pays the funding?
In general, when funding is positive, longs pay shorts. When it's negative, the reverse happens.
Does a perpetual have a holding cost?
Yes: trading fees and funding, which can be paid or received depending on which side of the position you're on.
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This content is for information only and is not investment advice. Trading crypto derivatives involves a high risk, including the total loss of your capital. Past results do not guarantee future results, and the figures mentioned are examples. Before trading, check whether trading crypto derivatives is allowed in your country and what your tax obligations are. Assess whether the product suits your profile before investing.