If you have searched for the meaning of perps in crypto, this explainer covers how perpetual futures work, why traders use them, and the safeguards to consider before you place a trade.
- Greater Market Reach: Perpetual contracts let you speculate on cryptocurrency moves without owning the underlying asset, and they offer leverage with relatively small initial collateral.
- Flexible Participation: Unlike a dated futures contract, perps have no expiration date and are continuously settled, which supports both speculation and hedging.
- Funding Payments: When the contract price trades above the spot price, longs typically pay shorts; when it trades below, shorts pay longs.
- Risk Controls: Tools such as stop-loss orders and prudent margin management are essential when trading these derivatives.
In practice, funding is assessed on a schedule set by the exchange (for example, hourly or every 8 hours), and the rate can be positive or negative. Because funding conditions change with market positioning, the amount you pay or receive can shift over time and may differ across platforms.
What Are Perps in Crypto?
Perpetual futures—often shortened to perps—are a type of derivative that tracks a cryptocurrency’s price without requiring delivery of the coin itself. Unlike traditional futures with an expiration date, a perpetual futures contract can be held indefinitely, so positions do not roll over on a schedule.
Because of this open-ended design, perps have become a preferred instrument for active crypto trading, allowing participants to react quickly to market shifts without the constraints of contract expiry.
In crypto markets, perps took off as derivatives venues looked for a simple way to offer leveraged exposure that stayed closely tied to spot pricing without forcing traders to manage expiries. BitMEX is widely credited with launching one of the first and most influential crypto perpetual swap products, and the format spread quickly as liquidity deepened and more exchanges added perpetual markets.
Benefits of Trading Perpetual Futures
Perps can serve as more than a directional bet. They combine flexibility, capital efficiency, and the ability to hedge exposure in a volatile market.
- Stay in a Trade on Your Timeline: With no expiry, you may hold a position as long as your margin allows, which suits fast-moving crypto markets.
- Amplified Exposure With Less Capital: Leverage lets traders control larger notional value with smaller upfront funds, improving capital efficiency when used responsibly.
- Ongoing Alignment to Spot: Funding mechanisms help keep the contract price close to the spot price, eliminating manual rollovers common in traditional futures.
- Portfolio Hedges: If you hold a cryptocurrency such as Bitcoin, you can short its perpetual contract to reduce downside risk during drawdowns.
These characteristics set perps apart from traditional futures in a few practical ways.
| Feature | Perpetual Futures | Traditional Futures |
|---|---|---|
| Expiration | No fixed expiry; a position can remain open as long as margin requirements are met. | Fixed maturity date; positions end or must be managed at expiry. |
| Settlement | Typically cash-settled with ongoing PnL updates via mark price. | Cash or physical settlement at expiry, depending on the contract. |
| Funding | Periodic funding payments between longs and shorts help keep price aligned to spot. | No funding payments; pricing reflects time-to-expiry and carry dynamics. |
| Rollover Requirements | No rollover needed to maintain exposure. | Traders often roll to a later expiry to stay in a position. |
Common approaches for trading perps include trend following (riding sustained momentum), scalping (targeting small moves over short time frames), basis trading (seeking to capture the spread between spot and perp pricing and/or funding), hedging (offsetting spot holdings with an opposing perp position), and arbitrage (exploiting pricing differences across venues or instruments).
How Perpetual Futures Work
Understanding the moving parts behind perps helps you manage trades more effectively. Here are the core components:
- Funding Rate: This is a periodic payment exchanged between long and short positions to nudge the contract toward the spot price. Traders sometimes incorporate funding into basis trading to seek yield.
- Mark Price: The mark price is used to calculate unrealized PnL and to determine when liquidations may occur. It typically reflects a blend of spot data and averaged perp prices from multiple venues.
- Leverage: Borrowed exposure magnifies gains and losses. Higher leverage narrows the margin for error and increases the chance of liquidation if the market turns against the position.
- Margin Requirements: Your account must maintain minimum equity relative to position size. If equity drops below maintenance margin, the position can be reduced or closed to cover losses.
Funding Rates Explained
Funding is central to how perps track the underlying market. Mastering this concept can materially influence your results.
In brief, funding payments discourage the contract price from drifting far from spot. Although each exchange and contract may compute funding differently, it is generally a periodic transfer between longs and shorts based on the difference between the contract price and the spot price.
Funding occurs at intervals defined by the exchange (commonly hourly or every 8 hours), and the rate can change from one interval to the next as market conditions shift. Depending on whether the perp is trading at a premium or discount, the funding rate can be positive or negative, meaning either longs pay shorts or shorts pay longs.
When the perp trades at a premium to spot, long positions usually pay; when it trades at a discount, short positions typically pay. This feedback loop helps curb persistent mispricing.
Funding is derived from current market conditions, including the contract’s basis relative to spot, plus an interest component. Monitor funding closely. Favorable payments can enhance returns for holding a position, while elevated rates can erode profits or flip a trade from profitable to marginal.
Example: Trading Bitcoin Perpetuals
Let’s tie these ideas together with a simplified scenario. Suppose you have $1,000 in your account and choose to trade Bitcoin perpetual futures using 5x leverage. At a Bitcoin price of $10,000, leverage allows you to control a larger notional position with your available capital.
Position Size and Leverage: With 5x leverage, $1,000 supports a $5,000 position. At $10,000 per Bitcoin, that equals 0.5 BTC of exposure.
Mark Price and Funding: Assume the mark price is $10,000 and funding is 0.01% every 8 hours. If you are long while the perp trades above spot, you will pay funding to shorts at each interval.
Margin and Liquidation: Your initial margin is $1,000, or 20% of the $5,000 notional. If price falls to $9,800, the position value becomes $4,900 (0.5 × $9,800), a $100 unrealized loss that lowers equity to $900. If maintenance margin is 10% ($500), dropping equity below that threshold can trigger liquidation to limit further losses.
Profit and Loss: If Bitcoin rises to $10,500, the position is worth $5,250 (0.5 × $10,500), a $250 gain—25% on your $1,000 initial margin. Holding for 24 hours at 0.01% funding per 8 hours means three funding intervals, or 0.03% of $5,000, which is $1.50. After funding, net profit would be $248.50.
Managing Risk When Trading Perpetual Futures
Perps are powerful tools, but they require discipline. If you plan to trade these contracts, consider the following safeguards:
Key risks include liquidation risk (positions can be force-closed when margin falls too low), leverage risk (small moves can create outsized losses), funding rate risk (payments can swing against your position and change over time), counterparty and platform risk (exchange outages, failures, or policy changes), and extreme market volatility (fast gaps and slippage can overwhelm tight risk limits).
Perpetual contracts can move faster than most traders expect; managing leverage and liquidation thresholds matters as much as getting the direction right.
- Set Stop-Losses: Automated exits help cap downside if price reaches a predefined level, which is especially important in volatile markets.
- Watch Your Margin: Keep sufficient equity to meet maintenance requirements, and monitor positions frequently to avoid forced liquidation.
- Dial Down Leverage: Conservative leverage reduces the odds of rapid drawdowns and gives trades more room to breathe.
- Diversify Exposure: Spread risk across different assets or strategies rather than concentrating on a single perpetual position.
- Stay Current: News, policy changes, and market sentiment can move crypto quickly. Staying informed supports better decision-making.
Regulation also matters. The legal status and availability of crypto perpetuals can vary widely by jurisdiction: some countries treat them as regulated derivatives with strict licensing and investor-protection requirements, while others limit or prohibit offering them to certain users (especially retail). Even where trading is possible, rules around leverage, disclosures, and platform registration may apply, so it’s important to check local laws and eligibility before trading.
Closing Thoughts
Whether you are new to crypto trading or already experienced, perps offer a versatile way to express views, hedge, and manage exposure. Approach them carefully, scale in gradually, and consider techniques such as dollar cost averaging as you build confidence.
