Perpetual futures, often called “perps,” are derivative contracts that track an underlying asset like Bitcoin or Ethereum but do not have an expiration date. Instead of settling on a fixed maturity, a position can remain open until the trader closes it, or it is liquidated due to insufficient margin.
How perpetual futures work
Like traditional futures, perps allow traders to take long positions to profit from rising prices or short positions to profit from falling prices. They are typically traded on margin, meaning traders post collateral and can use leverage to control a larger position than their upfront capital. Because leverage amplifies both gains and losses, exchanges monitor risk using mechanisms like margin requirements, a mark price, and liquidation engines designed to reduce the chance that losses exceed collateral.
Funding rates and price alignment
A defining feature of perpetual futures is the funding rate, a periodic payment exchanged between longs and shorts. When a perp trades above the spot price, funding is often positive, so longs pay shorts, which can encourage selling and pull the perp price closer to spot. When a perp trades below spot, funding can turn negative, so shorts pay longs, encouraging buying. This funding mechanism helps “anchor” the perpetual contract’s price to the underlying market without needing an expiry-based settlement.
Practical uses and why it matters
Perps are widely used for speculation and hedging. For example, a miner or long-term holder might short Bitcoin perps to hedge downside risk without selling their spot holdings. Active traders may use perps to express directional views, manage exposure across exchanges, or trade relative value between spot and derivatives.
Perpetual futures matter because they concentrate liquidity, enable efficient price discovery, and provide flexible hedging tools, but they also introduce leverage-driven risk that can accelerate volatility across crypto markets.