Perpetual Futures Contracts
What Are Perpetual Futures
Perpetual contracts (Perpetual Futures, Perps) are futures contracts with no expiration date. Unlike dated futures that automatically settle on a specific date, perpetual futures allow traders to maintain positions as long as they want.
First introduced by BitMEX in 2016, perpetual contracts have become the standard for cryptocurrency derivatives. Today, nearly all crypto derivatives exchanges including Binance, Bybit, and OKX offer perpetual futures, accounting for over 90% of total derivatives trading volume.
Why Are Perpetual Futures So Popular
No Expiry Management
Dated futures automatically settle on expiration day. Maintaining a long-term position requires "rolling over" to the next expiry contract before settlement - a cumbersome process. Perpetual futures eliminate this need.
Price Close to Spot
Thanks to the funding rate mechanism, perpetual futures prices closely track spot prices. Dated futures can have significant deviations from spot depending on time to expiry, but perpetual futures minimize this gap.
High Liquidity
Since most traders concentrate on perpetual futures, liquidity is highest here. Higher liquidity means lower slippage and minimal market impact even for large orders.
Comparison with Dated Futures
| Aspect | Perpetual Futures | Dated Futures |
|---|---|---|
| Expiry | None | Yes (weekly/monthly/quarterly) |
| Price Anchoring | Funding rate | Auto-convergence at expiry |
| Price vs Spot | Nearly identical | Premium/discount exists |
| Liquidity | Very high | Medium |
| Rollover | Not needed | Required |
| Primary Users | Retail traders | Institutions, arbitrageurs |
| Additional Cost | Funding rate | None (settlement at expiry) |
Institutional investors often prefer dated futures (especially CME), while retail traders primarily use perpetual futures.
The Funding Rate Mechanism
The core design of perpetual futures is the Funding Rate. Since there's no expiry, a mechanism is needed to keep prices from drifting away from spot - that's the funding rate.
Basic Principle
- Perp price > Spot price: Funding rate positive. Longs pay shorts
- Perp price < Spot price: Funding rate negative. Shorts pay longs
This mechanism creates:
- When futures price is above spot → cost of holding longs increases, so longs decrease → futures price drops to converge with spot
- When futures price is below spot → cost of holding shorts increases, so shorts decrease → futures price rises to converge with spot
Settlement Cycle
On most exchanges, funding is settled every 8 hours (00:00, 08:00, 16:00 UTC). If you hold a position at settlement time, you either pay or receive funding.
Detailed interpretation and application of funding rates are covered in Funding Rate Deep Dive.
Mark Price and Liquidation
Mark Price
The reference price used to determine liquidation in perpetual futures. The reason for using Mark Price instead of the last traded price is to prevent unfair liquidations due to temporary price manipulation.
Mark price is calculated by combining spot prices from multiple exchanges with the funding rate, so it's not affected by abnormal price movements on a single exchange.
Liquidation Price
Liquidation price is determined by leverage and margin. When mark price reaches the liquidation price, the position is forcibly liquidated.
Contract Units
USDT Margin (Linear Contract)
Contract size is denominated in USDT. Intuitive format like "1 BTCUSDT contract = 1 BTC." This is currently the most common method.
Coin Margin (Inverse Contract)
Contract size is denominated in USD, but margin and settlement are in the underlying asset (BTC, etc.). Format like "1 BTCUSD contract = $100."
Coin margin contracts are suitable for holding BTC while seeking additional yield, or for miners hedging their revenue.
Managing Perpetual Futures Positions
Opening a Position
- Select trading pair (e.g., BTCUSDT)
- Set margin mode (Cross/Isolated)
- Set leverage multiplier
- Choose direction (Long/Short)
- Enter order type and quantity
- Set stop-loss/take-profit
Maintaining a Position
- Monitor unrealized P&L
- Check funding settlement times (every 8 hours)
- Verify current price buffer from liquidation price
- Add margin if needed (for isolated margin)
Closing a Position
- Market close: Immediately close with opposite market order
- Limit close: Place opposite limit order at desired price
- Partial close: Close only part of position to adjust risk
Relationship Between Perpetual Futures and Spot
Movements in the perpetual futures market directly impact the spot market.
Futures → Spot Impact
- Large-scale liquidations: Cascade liquidations causing rapid futures price changes pull spot along
- Extreme funding rates: Signal market overheating/cooling, can be leading indicator of spot price reversal
- Open interest surge: Precursor to volatility expansion. Spot traders should be cautious
Spot → Futures Impact
- Large spot buys/sells: Index price changes affect mark price and liquidations
- Spot exchange outages: Can distort index price, causing futures market chaos
Perpetual Futures by Major Exchange
| Exchange | Max Leverage | Features |
|---|---|---|
| Binance | 125x | Highest liquidity, most trading pairs |
| Bybit | 100x | Trader-friendly UI |
| OKX | 125x | Various margin modes |
| dYdX | 20x | Decentralized perpetual futures |
| GMX | 100x | Decentralized, Arbitrum-based |
Summary
Perpetual futures have no expiry, are anchored to spot price via the funding rate mechanism, and provide high liquidity as the core cryptocurrency derivatives product. The mark price-based liquidation system provides protection against price manipulation, and USDT margin is the most commonly used format. Perpetual futures market data (funding rate, open interest, long/short ratio) serves as important market sentiment indicators even for spot investors.
Next article: Leverage and Margin - A Double-Edged Sword