What are Perpetual Futures?

 

Introduction

Imagine you’re a farmer and I’m a coffee shop owner. We agree today that, three months from now, I’ll buy 100 pounds of your coffee beans for $X per pound. We’ve basically entered a futures contract – a deal to trade something in the future at a price we lock in now. Traditional futures contracts work like that: they have a set expiration date (like our three-month deal) and on that date, the agreement is settled – either with the actual asset delivery or a cash difference payment. These contracts have been around forever in markets for commodities (oil, corn, etc.), and even financial assets. They let traders speculate on prices or hedge against price swings without exchanging the asset right away.

In plain terms, a traditional future is like a “save the date” for a trade. You commit to buying or selling later. If the price moves in your favor by expiry, you profit; if not, you could lose. And when the expiry date arrives, that contract must be settled one way or another. Think of it as an expiration date on a carton of milk – after that date, you either consume it or throw it out (in futures, this means settling the contract). No matter what, the contract doesn’t exist beyond its expiry.

Meet Perpetual Futures (Perps)

Now, what if you and I want to keep our trading deal going forever – or at least without a preset end date? Enter perpetual futures, often just called perps. A perpetual future is basically a futures contract with no expiration date. You can hold a perp position indefinitely (well, as long as you don’t get liquidated for running out of funds, but we’ll get to that). Perps were a funky idea proposed by economist Robert Shiller in the 1990s, but crypto exchanges made them famous in the last decade.

If a traditional future is like that “save the date” we talked about, a perpetual future is like a never-ending bet. There’s no date where everyone has to settle up and go home. You could say perps are like futures with commitment issues – they just never settle (literally). This sounds great (no expiries to worry about, no rolling over contracts every quarter), but it raises a question: without an expiry, how do perps stay tied to the real market price of the asset?

After all, a regular futures contract eventually converges to the spot price of the asset by expiration – for example, as the expiry draws near, the futures price and the actual price of Bitcoin will meet at the same point because on that date the contract settles at the real price. But a perp has no expiry to force convergence. Without some special mechanism, the price of a perpetual future could drift way off from the actual asset price and stay that way – which would be a problem.

The Secret Sauce: Funding Rates

The solution is something called the funding rate, and it’s the secret sauce that makes perpetual futures work. Don’t let the term scare you – it’s basically a small fee exchange between traders that happens periodically. Funding rates are designed to tug the price of the perp toward the price of the actual asset (often called the spot price in trader lingo).

Here’s how it works in practice: if the perpetual contract price is higher than the spot price (meaning traders are extra bullish in the perp market), the funding rate will typically be positive. This means longs pay shorts a tiny fee at regular intervals. It’s like saying, “Hey bull team, you’re too upbeat – pay the bear team a little to even things out.” The effect is that it becomes a bit more costly for longs to hold their position, which encourages some of them to close or for new traders to short, bringing the perp price down closer to reality. Now, if the perp price is below the spot price (everyone’s super bearish in the contract), the funding rate goes negative – so shorts pay longs. In other words, “Hey bears, you’re a bit too gloomy – compensate the bulls a little.” This nudges the price up.

Think of this funding rate mechanism as a thermostat for the market price. When things get too hot (perp price too high), the AC kicks in (longs pay shorts) to cool it off. When things get too cold (perp price too low), the heater turns on (shorts pay longs) to warm it up. The goal is to keep the perpetual contract price near the actual asset price, without having an expiration date to force it. In technical terms, funding payments help keep the perp price aligned with the spot price.

These funding payments usually happen every so often – for example, on Binance they occur every 8 hours by default. If you hold a position through the funding timestamp, you’ll either pay a fee or receive a fee, depending on whether you’re long or short and what the rate is. Important note: funding rates are exchange-driven and vary by platform and asset. They’re not a fee the exchange is charging, but rather a peer-to-peer swap between traders. The exchange is just enforcing the rule.

A Real-World Analogy for Funding Rates

If all that sounds abstract, let’s use a simple analogy. Imagine a parking garage that always wants to have the same number of cars on each level. If too many cars crowd into Level Long, the garage owner (the exchange) decides to raise the parking fee on that level and lower it on Level Short. So some cars (traders) will move down or leave Level Long because it’s pricey, and some might move into Level Short because it’s cheaper or even pays them. Eventually, the crowds balance out across levels. Here, the parking fee differences are like funding rates – a little financial incentive to keep things balanced between longs and shorts.

Another analogy: picture two teams playing tug-of-war (the classic bulls vs bears scenario). If one side gets way stronger (say everyone is betting long), the game introduces a quirk: the stronger side has to give the weaker side some candy every few minutes as long as they’re winning. Eventually, some folks might switch sides for the candy reward, which evens out the tug-of-war. That candy payment is essentially the funding rate in action!

The key point is, funding rates keep perpetual futures tethered to reality. Without them, a perpetual contract could run off into la-la land relative to the real price. With funding, there’s a continuous incentive for traders to push the perp price back in line. As a trader, you have to keep an eye on funding rates – if you’re long and the rate is strongly positive, you’re basically paying a recurring fee to stay in that position (which eats into your profits). If it’s strongly negative, you might actually get paid periodically to hold that long (sweet!). The opposite is true for shorts.

Leverage and Liquidation (Why Perps Are Popular and Risky)

Perpetual futures usually allow leverage, meaning you can put down a small amount of money to control a much larger position. This is one big reason they’re so popular – you can amplify your gains (and losses) significantly. For instance, Binance offers up to 125× leverage on some perp contracts, letting you trade a position 125 times larger than your capital. That’s like putting down $1 and getting $125 worth of buying power – pretty wild. Decentralized platforms like GMX might offer something like up to 50× leverage in practice. Leverage can be a double-edged sword: it’s great if the market moves in your favor, but if it goes against you, your losses pile up fast.

If your losses mount too high relative to your margin (the money you put up), you can be liquidated – the exchange will automatically close your position to prevent further losses. Think of this like a safety mechanism: if you borrowed your friend’s car (leverage) and crashed it (the trade went bad), at some point your friend is going to take the keys back (liquidate the position) before things get even worse. So while perps give you power with leverage, they also require discipline and risk management. (No one wants to wake up to find their position was closed out while they slept – ouch.)

Despite the risks, perpetual futures have become insanely popular in crypto trading. In fact, they often account for the majority of trading volume in crypto markets. By the end of 2022, more than $100 billion was traded in crypto perps daily – yes, every day. They let traders bet on Bitcoin, Ether, or even obscure crypto tokens going up or down, all without actually holding the coins. You can see why both speculators and hedgers (and, let’s be honest, gamblers) are drawn to them.

Perpetuals in Action: Binance vs Decentralized Platforms

Now that we know what perps are, let’s talk about where and how people trade them. You have two main arenas: Centralized Exchanges (CEXs) and Decentralized Exchanges (DEXs) that offer perpetual futures. The core idea of the perp is the same in both places, but the user experience and mechanics can differ a bit.

Centralized Example – Binance: Binance is one of the largest crypto exchanges, and it offers a ton of perpetual futures markets (BTC, ETH, and many other coins). On Binance, trading perps feels a lot like trading anything else on a big exchange – you have an order book, you can set limit or market orders, and so on. You deposit your funds on the exchange, and Binance holds custody of them (just like a bank holds your money). Binance’s perps are cash-settled and use that funding rate mechanism we discussed, with funding payments every 8 hours. So if you hold a Bitcoin perpetual long on Binance and the funding rate is 0.01% every 8 hours, you’ll pay that to a short holder (and vice versa if the rate is negative). Binance even has an interface showing the current funding rate and a countdown to the next payment. As mentioned, Binance allows crazy high leverage (up to 125x) on perps – though using max leverage is usually a bad idea unless you really know what you’re doing, because even a tiny price move against you can wipe you out.

Trading on a CEX like Binance is generally straightforward: you log in, deposit some USDT or another stablecoin, and you can open perp positions. The pros are speed, liquidity, and ease of use; the cons are you have to trust Binance with your funds and abide by their rules (KYC, geo-restrictions, etc.).

Decentralized Examples – dYdX, Hyperliquid, GMX: In the DeFi world, perpetual trading has also become a big deal. Platforms like dYdX, Hyperliquid, and GMX offer ways to trade perps without a traditional intermediary, using smart contracts on the blockchain.

• dYdX: dYdX is a leading decentralized exchange for perpetuals. It started out on Ethereum, moved to a layer-2 for speed (StarkWare), and now even has its own blockchain for its latest version. The cool thing about dYdX is it feels a lot like a centralized exchange in terms of interface and speed, but you hold your own funds in your crypto wallet. When you trade, you’re interacting with a smart contract. dYdX uses an order book model (not just an automated market maker), so it’s very much like trading on a regular exchange, except decentralized. You still have funding rates on dYdX perps, and they serve the same purpose of aligning prices. For example, if a lot of traders are long on dYdX’s BTC perp, longs will pay shorts funding just like on Binance. dYdX became so popular that at one point it was the largest DeFi trading platform by volume for perps.
• Hyperliquid: Hyperliquid is a newer player that launched its own high-performance blockchain specifically for trading perps. Think of Hyperliquid as trying to combine the best of Binance and DeFi: it’s on-chain (so you control your keys) but it built a custom chain to be super fast and handle lots of trades, mimicking the speed of a centralized exchange. It even has a classic order book and matching engine, all on-chain, to give that CEX-like experience. The idea is you get low latency, high throughput trading without trusting a centralized company. If you’re a trader who values decentralization but hates the slowness or clunkiness of some blockchain apps, Hyperliquid might sound appealing. Like others, it uses funding rates to keep prices in check (under the hood it’s the same concept).
• GMX: GMX is a popular decentralized perp exchange on networks like Arbitrum (an Ethereum layer-2) and Avalanche. It takes a different approach: instead of an order book, GMX uses a liquidity pool model. Traders on GMX are trading against a big pool of assets (called GLP), which is provided by liquidity providers. When you long or short on GMX, the GLP pool is essentially the counterparty to your trade. If you win, the pool pays you out; if you lose, you’re paying into the pool. Funding rates exist here too – if the pool is imbalanced (say lots more longs than shorts or vice versa), the dominant side pays a funding fee to the other side to encourage the market to balance out. GMX offers up to 50x leverage on its trades, and it’s all done through your wallet, no centralized account needed. One thing users like about GMX is the simplicity (you can trade directly from your MetaMask wallet, for example) and often lower fees or zero price impact for trades due to their oracle pricing model. But since it’s decentralized, you have to trust the smart contracts and the pricing oracles – so there are different risks (smart contract bugs, oracle failures, etc.) compared to a CEX.

All these platforms ultimately do the same thing: let you trade the price of an asset with leverage, without owning the asset, and without expiry. They just go about it in slightly different ways. Binance is custodial and centralized; dYdX is non-custodial and uses an order book on a custom chain; Hyperliquid built its own chain for speed; GMX uses an automated liquidity pool model. The fact that even decentralized exchanges have hopped on the perpetual futures bandwagon shows how in-demand these instruments are across the crypto world.

Wrapping Up

Perpetual futures have revolutionized crypto trading by combining the benefits of futures (like leverage and hedging) with the convenience of no expiry date. They’re like the energizer bunnies of trading contracts – they can just keep going and going. We’ve seen how traditional futures are time-bound agreements that eventually settle, whereas perpetual futures are open-ended and rely on clever mechanics (funding rates) to stay on track.

If you’re a beginner, the key takeaways are: perps let you bet on prices without expiry, you can use leverage (but be careful!), and you need to understand funding rates because they’ll affect your PnL (profit and loss) over time. For the more seasoned folks, it’s clear why perps dominate crypto volumes – they offer flexibility and opportunities for arbitrage, speculation, and hedging 24/7 in a market that never sleeps.

In a nutshell, perpetual futures are an exciting tool in the crypto trader’s toolkit. They can seem a bit complex at first (funding rates, oh my!), but with a human-friendly explanation (hopefully this one did the job), they start to make sense. Whether you try them on a big exchange like Binance or a decentralized platform like dYdX, Hyperliquid, or GMX, remember to trade carefully, watch those funding rates, and maybe keep a thermostat handy for those hot markets. Happy trading!

 

Frequently Asked Questions About Perpetual Futures

Basic Understanding

Q: What’s the main difference between perpetual futures and traditional futures?
A: Traditional futures have a fixed expiration date when the contract must be settled. Perpetual futures have no expiration date, allowing traders to hold positions indefinitely as long as they maintain sufficient margin and manage funding payments.

Q: Do I actually own the underlying asset when trading perpetual futures?
A: No. When trading perpetual futures, you’re simply speculating on the price movement of the asset without owning it. These are synthetic derivatives that track the price of the underlying asset.

Q: How do perpetual futures stay close to the spot price without an expiration date?
A: Through funding rates. These periodic payments between longs and shorts create economic incentives that help keep the perpetual futures price aligned with the spot price. When the perp price is higher than spot, longs pay shorts; when lower, shorts pay longs.

Trading Mechanics

Q: How often are funding rates paid?
A: It varies by platform. For example, Binance processes funding payments every 8 hours, while other exchanges might do it every 1, 4, or 24 hours. Always check the specific exchange’s rules.

Q: Can funding rates ever get extremely high?
A: Yes. During periods of extreme market volatility or strong directional bias, funding rates can spike dramatically. For example, during major market crashes, short-biased funding rates have reached annualized rates of -100% or more, meaning shorts were paying significant fees to longs.

Q: Is there a limit to how long I can hold a perpetual futures position?
A: Technically no, as long as you maintain sufficient margin and can afford any funding payments. However, the cumulative effect of funding rates over time can significantly impact profitability, especially in trending markets.

Q: What happens if I don’t have enough funds to pay the funding fee?
A: If your account doesn’t have enough funds to cover funding payments, most exchanges will automatically use a portion of your position’s collateral. If this reduces your margin below maintenance requirements, you risk liquidation.

Risk Management

Q: How does liquidation work with perpetual futures?
A: When your position’s losses approach your posted collateral, the exchange will liquidate (forcibly close) your position to prevent further losses. The exact liquidation threshold depends on your leverage and the exchange’s maintenance margin requirements.

Q: Is there any way to avoid liquidation once triggered?
A: Generally, no. Liquidations happen automatically and quickly. The best approach is preventative: use reasonable leverage, set stop losses, and actively monitor positions, especially during volatile market conditions.

Q: What’s a safe amount of leverage for beginners?
A: Most experienced traders recommend beginners use no more than 2-5x leverage while learning. Even experienced traders rarely use the maximum leverage offered by exchanges because small price moves can cause liquidation.

Strategy and Advanced Topics

Q: Can I use perpetual futures for hedging?
A: Absolutely. Many holders of actual crypto assets use perpetual shorts to hedge their spot positions. For example, if you own Bitcoin but worry about short-term price drops, you could short a BTC perpetual contract to offset potential losses.

Q: What are funding rate arbitrage strategies?
A: Some traders specifically target opportunities where funding rates are extremely negative or positive. For example, if funding is highly negative (shorts paying longs), they might open a long position primarily to collect funding payments, while hedging elsewhere to minimize directional risk.

Q: How do perpetual futures affect the broader crypto market?
A: Perpetual futures have become so large in trading volume that they can sometimes drive the spot market rather than just following it. Large liquidation events in perps markets can cascade into spot price movements, and funding rates can provide signals about market sentiment.

Q: Are there tax implications specific to trading perpetual futures?
A: Yes. In many jurisdictions, futures contracts are taxed differently than spot trading. Additionally, funding payments may be considered separate taxable events from the profit/loss of the trade itself. Consult a tax professional for guidance specific to your location.

Platform Comparison

Q: Which is better for beginners: centralized or decentralized perpetual exchanges?
A: Centralized exchanges like Binance typically offer more user-friendly interfaces, better liquidity, and customer support, making them generally easier for beginners. Decentralized platforms require more technical knowledge but offer greater control over your funds.

Q: Do all perpetual futures platforms use the same funding rate calculation?
A: No. While the basic concept is similar across platforms, the specific formula, frequency, and caps on funding rates can vary significantly. Always review the methodology used by your chosen exchange.

Q: Can I trade perpetual futures with fiat currency?
A: Most crypto perpetual futures are collateralized with cryptocurrency or stablecoins rather than fiat. However, some centralized exchanges do allow you to fund your account with fiat, which you can then use to trade perpetual futures.

Getting Started

Q: What’s the minimum amount I need to start trading perpetual futures?
A: This varies by platform. Some exchanges allow you to start with as little as $10-20, while others might require minimum position sizes of $50-100 or more.

Q: What tools should I use to monitor funding rates?
A: Most exchanges display current and historical funding rates directly on their platforms. For cross-exchange analysis, websites like CoinGlass, Coingecko, or CoinMarketCap offer funding rate comparisons across multiple platforms.

Q: Are there any perpetual futures for assets outside of crypto?
A: While perpetual futures were popularized in crypto markets, the concept has begun expanding to other assets. Some platforms now offer perpetual contracts for traditional financial assets like stock indices, commodities, and forex pairs.