What Is Perpetual Futures Trading?

Perpetual futures are derivative contracts that let traders speculate on an asset’s price without an expiration date. In other words, you can hold a perpetual position indefinitely as long as your margin covers it. These contracts are very popular in cryptocurrency markets and trade 24/7, but they can also be created for other assets like commodities or stock indexes. Perpetual futures were first launched by crypto exchange BitMEX in 2016, though economist Robert Shiller had described a similar concept back in the 1990s.

Compared to normal futures contracts, perpetual futures have a key difference: they do not expire. Traditional futures end on a set date, requiring you to settle or roll over the position. Perpetuals skip that step. Instead, they use a funding rate mechanism, a small periodic payment exchanged between longs and shorts to keep the contract price close to the market price. In other words, funding keeps the perpetual price aligned with the real price.

Perpetual futures often allow high leverage. You can control a large position with a small deposit, which can multiply both gains and losses. For example, with 10× leverage, a $100 deposit lets you trade as if you had $1,000 of the asset. If the price moves 5% in your favor, you earn $50 (a 50% return on $100); if it moves 5% against you, you lose $50. This magnifies potential gains, but it also raises the risk of big losses or liquidation. Even a small move against you at high leverage can wipe out your deposit.

In summary, perpetual futures let you bet on price movements without owning the asset and without any contract deadline. Because of their unique features, they have become a distinct trading product. Below, we cover the main points in brief, then explain everything in detail.

Key Takeaways

• No expiration: Perpetual futures have no expiry date, so you can hold a position indefinitely as long as your margin remains sufficient.
• Funding rate mechanism: Traders periodically pay funding fees to each other to keep the futures price in line with the spot price.
• High leverage: These contracts often allow very high leverage. Small capital can control large positions. This can boost your gains or losses.
• 24/7 markets: Crypto perpetual markets never sleep. You can trade at any time, even on weekends, which adds flexibility.
• Use cases: Traders use perpetual futures for speculation (betting on price going up or down) and for hedging existing positions. Some also use them for arbitrage when prices diverge.
• Risk management: Always use stop-loss orders and limit your risk on each trade. Be mindful of trading fees and funding payments, as these can eat into gains.

How Are Perpetual Futures Different From Traditional Futures?

Perpetual futures share many concepts with traditional futures, but there are important differences:

• Expiration: Traditional futures contracts expire on a set date. Perpetual futures never expire. You never have to roll over or settle a perpetual contract at a deadline.
• Funding: Perpetual futures use a funding rate mechanism. Traders periodically exchange small payments based on the price difference between the futures and spot markets. Traditional futures do not have these ongoing payments; they are kept in line through final settlement or delivery.
• Leverage: Crypto perpetuals often allow much higher leverage (sometimes 10×, 50× or more). Many traditional futures (especially in regulated markets) limit leverage to smaller amounts.
• Trading hours: Crypto perpetual markets operate 24/7. Traditional futures (like those on commodities or stock indices) usually trade only during specific exchange hours.
• Settlement: Perpetual futures settle continuously in cash, with no physical delivery of the underlying asset. In contrast, traditional commodity futures often settle by delivery or fixed cash settlement at expiry.

In short, perpetual futures act like continuous futures without an end date. They feel more flexible than standard futures, but that flexibility comes with different mechanics (funding fees, continuous margin, etc.) and risks.

How to Trade Perpetual Contracts?

Trading a perpetual futures contract involves these basic steps:

1. Choose a platform: Pick a crypto exchange that offers perpetual futures. Open an account and deposit funds. Perpetual futures usually use stablecoins (like USDT or USDC) or crypto as collateral (margin).
2. Select your contract: Decide which asset’s perpetual you want to trade (Bitcoin, Ethereum, etc.) and select that perpetual contract on the platform. Contracts are usually quoted against a stablecoin.
3. Choose long or short: Decide your direction. Going long (sometimes called longing the contract) means you expect the price to rise. Going short means you expect the price to fall. (By design, each perpetual contract always has one trader on the long side and one on the short side.)
4. Set leverage and margin: Enter the amount of margin (your deposit) and the leverage multiplier you want (if the platform allows it). Higher leverage amplifies both gains and losses. It’s common to start with low leverage (e.g., 2×–5×) until you’re comfortable.
5. Place your order: Use a limit or market order to open the position at your desired price and size. Once filled, your position is open. The exchange will display your entry price, current margin, and liquidation price (the price where your margin would be wiped out).
6. Monitor the position: Watch market prices. Your position’s profit or loss is updated continuously in your margin balance. If the market moves against you and your margin falls below the maintenance requirement, the exchange will liquidate your position. For example,
7. Close or exit: To realize profit or loss, close the position by entering an opposite trade (sell if you were long, buy if you were short). Since perpetuals have no expiry, you keep it open until you decide to close (or until liquidation).
8. Manage fees and funding: Remember to include fees. Each trade incurs a trading fee (a small percentage). Also, check the funding rate. Depending on market conditions, you will periodically pay or receive a funding fee. If you’re on the expensive side of the market, you pay; if you’re on the cheaper side, you receive. Funding typically occurs every 8 hours, and it can affect profitability if you hold positions long-term.

Pro tips:

• Use stop-loss orders: Always set a stop-loss to limit your downside. Many experts recommend never risking more than 1-2% of your capital on a single trade.
• Start small: Begin with low leverage (2×–5×) and small position sizes until you gain experience. High leverage can trigger quick liquidation.
  
• Have a clear plan: Define your entry, exit (take-profit), and risk level before trading. Sticking to a plan helps avoid emotional decisions.
• Monitor funding rates: If you keep a trade open for days, the funding payments can add up. High funding rates can erode profits. Check the rate and factor it into your strategy.
• Keep margin as buffer: Don’t use all available margin. Keep an extra margin in your account to withstand market swings.

Why Use Perpetual Futures?

Traders use perpetual futures for several reasons:

• No expiry – more flexibility: You can follow a trend or hedge a position as long as you need, without rolling contracts. For example, if you have a long-term view on Bitcoin, you don’t have to worry about switching contracts.
• High leverage: You can control a large position with a small amount of capital. This gives higher profit potential compared to spot trading. (Of course, leverage also raises risk.) For instance, controlling $10,000 of Bitcoin with a $1,000 deposit is possible in perpetual futures, which wouldn’t be possible by simply buying Bitcoin.
• Hedging existing holdings: If you already own an asset, perpetual futures let you offset price risk. For example, a trader holding Bitcoin could sell (short) Bitcoin perpetual futures to protect against a price drop. This is effectively an insurance against losses on the held asset.
• Speculation: You can bet on prices going up or down. If you expect a rise, you go long; if you expect a decline, you go short. This two-way speculation is a major attraction.
• Arbitrage: Sometimes, the perpetual price and the spot price diverge slightly. Traders can exploit these small gaps. For instance, if the BTC perpetual is trading above the spot price, one could sell the futures and buy spot, locking in a risk-free gain. This process keeps prices in line.
• 24/7 markets: Crypto perpetual markets operate day and night. You can react immediately to news or price moves, unlike traditional markets with set hours.
• High liquidity and volume: Perpetual futures markets are often extremely liquid. In crypto, they often have more trading volume than spot markets. For context, one report noted that over $100 billion per day was traded in crypto perpetual futures by late 2022. High liquidity means you can enter or exit large trades with less price slippage.

Overall, perpetual futures give traders powerful tools: leverage to amplify returns, the ability to hedge, and nonstop trading access. However, these benefits come with higher risk and costs, so careful risk management is essential.

FAQs

How does perpetual trading work?

Perpetual trading works much like normal futures trading, but with continuous settlement. In each perpetual contract, one trader is on the long side and one is on the short side. Going long (sometimes called longing) means you will profit if the price goes up; going short means you profit if the price goes down.

To open a trade, you deposit margin (your collateral) and set a leverage level. The exchange then continuously updates your position’s value as the market price changes. Your profit or loss is reflected in your margin balance in real time.

If the market moves against you and your margin falls below the maintenance requirement, the exchange will liquidate your position to prevent further loss.

Another key feature is the funding rate. Periodically (often every 8 hours), longs and shorts exchange a small payment based on the price difference between the perpetual and the spot markets. If the perpetual price is above spot (market in contango), longs pay shorts. If it’s below (market in backwardation), shorts pay longs. This keeps the perpetual price aligned with the real market price.

In short, to trade a perpetual you take a leveraged long or short position with margin, pay or receive funding fees regularly, and then close the position (or get liquidated) for profit or loss.

What is an example of a perpetual trade?

Imagine Bitcoin (BTC) is at $30,000 and you expect it to rise. You open a 10× long position with $100 of your funds (so you control $1,000 of BTC). If BTC goes up 5% (to $31,500), your position’s value is $1,050, so you make $50, a 50% gain on your $100 deposit. If BTC instead falls 5%, you lose $50 on that $100 (and risk liquidation if it falls much further).

Now, imagine you expect BTC to fall. You open a 10× short position with $100. If BTC falls 5%, you again make $50 (50% gain on your deposit). If BTC rises 5%, you lose $50. Essentially, one trader’s gain is another trader’s loss. As Investopedia puts it, perpetual futures let you “profit when you guess right” about prices moving up or down.

This example ignores fees. In reality, each trade has a small exchange fee, and if the position stays open, you will also pay or receive funding payments. But the mechanics are the same: you gain if your prediction is correct, and lose if it isn’t.

Is perpetual trading profitable?

Perpetual trading can be profitable if you correctly predict price moves and manage risk, but it is not guaranteed. The high leverage means that small price changes can create big gains. For example, even a 5% price move can double a 10% leveraged position. However, the reverse is also true: small adverse moves can wipe out your margin. As noted above, a 5% drop at 20× leverage would liquidate the trade. Successful trading requires careful strategy. Many traders emphasize strict risk limits. For example, a common tip is to “never risk more than 1-2% of your total capital on a single trade”. Using stop-loss orders to cut losses is also widely recommended.

Also, remember fees: you pay trading fees on orders, and funding fees when you hold positions. Funding fees, in particular, can accumulate over time and reduce profits. In summary, perpetual trading offers higher profit potential but comes with higher risk and costs. Many traders can and do make money, but many also lose. As one guide concludes, perpetual futures can be a valuable tool if you thoroughly understand the mechanics and manage the risks carefully.

How long can you hold a perpetual trade?

You can hold a perpetual trade as long as you like, in theory. Since perpetual futures have no expiry date, your position remains open until you close it or it gets liquidated. Many traders keep positions open for days or weeks if they believe in a trend or are hedging.

However, keep in mind the funding payments: every 8 hours (roughly), you will either pay or receive a funding fee. Over time, these fees can add up and affect your profit. If you want to exit a trade, you simply place an opposite order to close the position.

In practice, you can hold a perpetual position indefinitely, but you must maintain enough margin to avoid liquidation and periodically pay the funding fees. Many traders eventually close positions as market conditions or costs dictate. The key is to monitor your margin and the funding rate while the trade is open.