Perpetual contracts are the most widely traded derivative in crypto markets. They function like futures but have no expiration date, which means you can hold a position for as long as you want. This simplicity, combined with leverage and the ability to go long or short, has made perps the dominant instrument for active crypto traders.

How perpetual contracts work

A perpetual contract tracks the price of an underlying asset, typically a cryptocurrency like Bitcoin or Ethereum, though perps also exist for stocks, commodities, and other assets. When you open a long position on a BTC perp at $60,000 and Bitcoin's price rises to $65,000, your position profits $5,000 per contract. If Bitcoin drops to $55,000, your position loses $5,000.

The contract itself has no settlement date. Unlike a traditional future that expires on a specific date and forces you to close or roll your position, a perp stays open indefinitely. You close it whenever you choose by placing an opposing trade (selling to close a long, buying to close a short).

The funding rate mechanism

Because perpetuals never expire, they need a mechanism to keep their price aligned with the underlying spot price. This mechanism is the funding rate.

Funding is a periodic payment exchanged between long and short position holders, typically every eight hours. When the perp trades above spot price (meaning longs are dominant), long holders pay shorts. When the perp trades below spot (shorts are dominant), short holders pay longs.

This creates an economic incentive that pulls the perp price back toward spot. If longs are paying a high funding rate, some will close their positions to avoid the cost, which reduces buying pressure and brings the price down toward spot.

As a trader, funding rates affect the cost of holding a position over time. A positive funding rate when you're long means you're paying to hold the position. Over days and weeks, these payments add up and reduce your profitability. Checking the current and historical funding rate before entering a position tells you what you'll pay (or earn) for staying in the trade.

Leverage on perpetual contracts

Most perpetual contract platforms offer leverage ranging from 1x to 100x or higher. Leverage lets you control a larger position than your deposited margin would normally allow. At 10x leverage, a $1,000 margin deposit controls a $10,000 position.

The leverage you choose determines your liquidation price, the point at which the exchange closes your position to prevent further loss. Higher leverage means a tighter liquidation price. At 100x leverage, a 1% move against you triggers liquidation. At 5x, you can absorb a roughly 20% adverse move before liquidation.

Experienced traders typically use low to moderate leverage (2x to 5x) and treat the rest of their buying power as a buffer against volatile moves. The availability of high leverage does not mean you should use it.

Who trades perpetuals

Perpetuals attract several types of traders. Speculators use leverage and short-selling capabilities to profit from both rising and falling markets. Hedgers use short perp positions to protect spot crypto holdings during uncertain periods. Market makers provide liquidity on both sides and profit from the bid-ask spread.

The combination of 24/7 trading, leverage, and directional flexibility makes perpetuals the most active market in crypto. On busy days, perp trading volume can exceed spot trading volume by a factor of five or more across major exchanges.

Practical considerations

Perpetuals are powerful instruments, but they require more attention than spot positions. Funding rates can shift from working in your favor to working against you as market sentiment changes. Liquidation risk means you need to monitor positions actively or use stop-loss orders to protect your margin.

Before trading perpetuals, understand the specific platform's margin requirements, funding rate schedule, and liquidation mechanics. These details vary by platform and directly affect the economics of every position you take.