A perpetual futures contract, often called a perpetual swap, is a crypto derivative that tracks an asset’s price without an expiration date. Traders gain exposure to price movements using margin, but they do not need to own the underlying asset. Funding payments and arbitrage usually keep the perpetual’s price close to the underlying’s, although that closeness is never guaranteed.
How it works
A perpetual contract is an agreement between a trader and an exchange or decentralized venue to gain exposure to changes in an underlying asset or index. Most crypto perpetuals are cash-settled: profit or loss is paid in the contract’s settlement currency rather than by delivering the underlying asset. The trader posts collateral, called margin, to support the position.
The contract follows a reference price supplied by an index or oracle rather than relying on a single reported trade. If a trader enters at one price and closes at another, the difference determines profit or loss, subject to fees, funding and other adjustments. Because there is no scheduled expiration, a position can remain open until the trader closes it, the venue liquidates it, or another contract condition ends it.
- A long position generally profits when the underlying price rises and loses when it falls.
- A short position generally profits when the underlying price falls and loses when it rises.
- Owning the underlying asset is not required, so a perpetual offers exposure rather than ownership.
Funding keeps the two prices connected
A perpetual’s quoted price can differ slightly from the spot price or index used as its reference. This difference is the premium. To discourage that gap from growing, most perpetual contracts use a periodic funding mechanism.
When the perpetual trades above the reference price, longs typically pay shorts. When it trades below the reference price, shorts typically pay longs. The payment usually occurs at specified intervals, and the amount is determined by a published formula. Exact formulas, intervals, interest-rate assumptions and caps vary between venues, so the payment is not always a simple dollar-for-dollar reflection of the price gap.
Arbitrage helps keep the prices aligned. If a perpetual is unusually expensive, a trader might buy the underlying in the spot market and sell the perpetual. If the perpetual is unusually cheap, the reverse trade may be attractive. This activity tends to narrow the gap.
Funding is not a guarantee that the perpetual will equal the spot price. It is also a cost or benefit to the position: a trader can remain profitable on the underlying’s direction and still lose money after funding, fees and price movements are included. Positive funding can also discourage crowded long positions by making them more expensive to hold.
Perpetual, spot and dated futures compared
Spot trading means buying or selling an asset directly. Owning an asset in spot gives the holder a claim on that asset, subject to custody and account rules. Spot purchases do not expire and ordinarily do not incur perpetual-contract funding or liquidation. A perpetual, by contrast, is a derivative agreement that provides price exposure but not ownership of the underlying asset.
Dated futures expire on a specified date. Before expiration, their price can differ from the underlying’s spot price because of interest rates, storage or financing costs, supply and demand, and market expectations. A trader must close or roll the contract into another expiry. A perpetual removes that expiration and rollover process, but replaces the dated contract’s basis with ongoing funding payments.
Both perpetual and dated futures are derivatives. They can be leveraged, and both can produce losses larger than the margin posted if losses are not properly controlled. A spot position can also be margined through borrowing, but that introduces borrowing costs and its own liquidation risk.
Leverage, margin and liquidation
Leverage means that the contract’s total exposure is larger than the trader’s collateral. For example, collateral equal to one-tenth of a position’s notional value creates 10 times exposure. A relatively small percentage move in the underlying can then produce a much larger percentage gain or loss on the trader’s margin. Leverage magnifies gains as well as losses.
Perpetual venues generally distinguish between initial margin, needed to open or maintain a position, and maintenance margin, a lower threshold used to determine whether the position remains adequately collateralized. If a position’s remaining value falls below the applicable requirement, the venue may liquidate some or all of it. A long position is normally liquidated as the price falls; a short position is normally liquidated as the price rises.
Liquidation is not a guaranteed stop-loss order. Rapid price moves can cause execution at a worse price than the trigger level, and fees or funding may consume additional collateral. Depending on the venue’s terms and the circumstances of the move, losses can exceed the initial margin. Margin arrangements also vary: isolated margin limits collateral to a designated amount, while cross margin may draw on balances elsewhere in the account.
A hypothetical example
These numbers are purely illustrative and are not a forecast or recommendation. Imagine a trader opens a 10-times leveraged long perpetual using an amount of margin equal to one-tenth of the position’s notional value. If the underlying rises by 5%, the position gains approximately 50% of that margin before fees, funding and liquidation effects. If the underlying instead falls by 5%, the position loses approximately 50% of the margin.
A further adverse move could exhaust the margin and trigger liquidation before the trader closes the position. For a short perpetual, the direction of the gain and loss would be reversed. Actual returns would also depend on the funding paid, transaction costs, the venue’s maintenance requirements and the exact path of the price movement.
What people use them for
Perpetual contracts can provide short-term exposure without holding the underlying, allow traders to hedge an existing position, or enable market-making and arbitrage strategies. A business that expects to receive crypto in the future may use a short perpetual to offset some price exposure before the crypto arrives. Such a hedge is imperfect because contract gains and losses may differ from the business’s actual holdings, especially after funding, fees and differences between the contract and spot prices are considered.
The main risks
- Leverage risk: Large exposure relative to margin can turn modest price changes into rapid losses and liquidation.
- Funding and basis risk: Holding a position over time may create costs, while the perpetual can trade at a persistent premium or discount to its reference price.
- Execution risk: Fast markets, gaps and market liquidity can produce poor liquidation or closing prices.
- Platform and counterparty risk: A centralized venue controls the contract and holds the trader’s collateral; an outage, withdrawal restriction or insolvency could prevent access.
- Oracle and technical risk: A faulty index, disrupted price feed, software flaw or failure of collateral infrastructure may cause incorrect pricing or inability to close a position.
- Legal and tax risk: Derivatives, leverage and crypto activity may face restrictions or different tax treatment depending on the trader’s location and the venue’s structure.
There is also no assurance that the underlying market will remain liquid, that the venue will continue operating, or that a hedge will offset losses exactly. Perpetuals remove expiration, but not market, operational or financial risk.
This is general information, not financial advice. Perpetual contracts are complex, leveraged instruments, and their terms and risks differ across venues.
Key takeaways
- A perpetual futures contract is a derivative with no expiration date that tracks an underlying asset or index.
- Funding payments generally connect perpetual and spot prices: longs pay shorts when the perpetual is above its reference, and vice versa when it is below.
- Leverage magnifies both gains and losses, while maintenance-margin rules can force a position to close.
- Unlike spot ownership, a perpetual provides exposure rather than the underlying asset; unlike a dated future, it has no scheduled expiry or rollover.
- Funding, liquidation, venue reliability, oracle accuracy and legal considerations are material risks even when price direction is correctly anticipated.
Frequently asked questions
Do perpetual futures contracts expire?
No. A perpetual can remain open until the trader closes it or it is liquidated. It may continue accruing funding while open, and the trader can usually exit at any time when the venue is operating normally.
Why does the funding rate matter?
Funding represents an ongoing transfer between long and short traders and helps align the perpetual with its reference price. If the perpetual trades above the reference, longs commonly pay shorts; if it trades below, shorts commonly pay longs. The amount and timing depend on the venue’s formula.
Can I lose more than my initial margin?
Potentially. Liquidation is designed to reduce the risk of an uncovered loss, but rapid moves, poor execution, fees and funding can create losses beyond the initial margin. The precise outcome depends on the venue’s margin and liquidation terms.
Is a perpetual contract the same as buying the asset?
No. Buying in spot gives ownership of the asset, subject to custody arrangements. A perpetual gives contractual exposure to price movements without ownership. Its return can differ from holding the underlying because of leverage, funding, fees and basis changes.