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Perpetual futures

A perpetual future is a futures contract with no end date, used to open longs or shorts with leverage. Its price is kept near spot by the funding fee that longs and shorts regularly pay each other.

Skenuok.lt teamPublished 3 min read

Futures and spot

On the spot market you buy the coin itself, and it lands in your account. A futures contract is an agreement on a future price: you do not hold the coin itself, and the result depends on how the price changes. A classic futures contract has an end date, for example the end of a quarter.

A perpetual has no end date: the position can stay open for as long as the margin allows. When people in crypto say "futures", this is usually what they mean.

Spot and perpetual prices almost match, the contract has no end date, and longs and shorts pay each other a funding fee.
Illustration from the Skenuok glossary: spot and perpetual prices.

How the price stays near spot

Without an end date the contract price could drift away from spot. The funding rate prevents that. When it is positive, longs pay shorts; when negative, shorts pay longs. For example, Binance's default funding interval is 8 hours, though some contracts settle more often, and the money moves between traders, not to the exchange (Binance documentation).

What they are used for

  • Shorts: you can open a short that gains when price falls.
  • Leverage: the position can be several times larger than the margin.
  • Hedging: if you hold coins on spot, a short can soften the impact of a price drop.

A worked example

Say you have 200 USDT of margin and open a 5x long BTC perpetual: the position is 1,000 USDT. If BTC rises 3%, the position gains 30 USDT, which is 15% of the margin. If it falls 3%, you lose 30 USDT. On top of that come the trading fee on 1,000 USDT and the funding for every period the position stays open.

EU financial supervisors warn that many crypto-assets are highly risky and speculative, and buyers can lose all the money they put in (ESMA, EBA and EIOPA, 2022-03-17). Leverage adds to that risk.

Common mistakes

  • Forgetting the funding rate. A position held for a long time can pay more than expected.
  • Mixing up futures and spot prices and drawing levels on the wrong chart.
  • Not knowing your liquidation price and margin mode.

How to practise

On one exchange, compare the BTC/USDT spot and perpetual charts: they almost match but are not identical. Then, for a few practice scenarios, work out the position size, the liquidation price and a week of funding costs. Note what holding the position for a month would cost if the rate stayed the same. More in Leverage and futures.

RiskThis content is for education only and is not financial or investment advice. Crypto trading carries a high risk of loss. We do not promise profits.

Frequently asked questions

How do futures differ from spot?
On spot you buy the coin itself. Futures are a contract on price: you do not hold the coin, but you can go long or short and use leverage. Leverage brings liquidation risk, which a plain spot purchase does not have.
Who pays the funding rate?
When the rate is positive, longs pay shorts; when it is negative, the reverse. Binance, for example, states that it takes no cut: the payment moves between traders.
Can you hold a perpetual for years?
Technically yes, if the margin holds. But funding is paid or received every period, so holding for a long time has a cost.

You can review and test yourself on these terms in the Skenuok app.

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Related terms

LeverageLeverage is borrowed funds that let you open a bigger position than your own money allows. It magnifies profit and loss equally.Liquidation and marginMargin is your own money backing a leveraged position. If losses nearly eat it up, the exchange force-closes the position: that is liquidation.Position: long and shortA position is an open trade: a long profits when price rises, a short when price falls. Shorts are usually opened with futures.Funding rateA periodic payment between longs and shorts in perpetual futures. When it is positive, longs pay shorts; when it is negative, the reverse.Isolated and cross marginIn isolated mode you only risk the margin assigned to that position. In cross mode the whole account balance is the collateral, so you can lose more.HedgeA position in the opposite direction that lowers overall risk, e.g. you hold BTC and open a small short. It reduces both loss and potential gain.