2026.07.27 2026.07.27
What Are Perpetual Futures Contracts (Perps)?

Gleb Kabanovhttps://www.litefinance.org/blog/authors/gleb-kabanov/

Imagine a futures contract that never expires. Instead of closing on a fixed expiration date, you can keep your position open for as long as you choose, whether it is a day, a week, a month, or even longer. That is exactly how perpetual futures contracts work.

This financial instrument originated in the cryptocurrency market and quickly gained popularity. Commonly known as “perps,” they are now offered by many centralized exchanges, including those that support traditional financial markets. They allow traders to use leverage without having to worry about contract expiration.

But what are perpetual futures contracts, and how does the funding rate work? How do perps differ from standard futures, and where can they be traded safely? Let’s explore these questions in detail.

Major Takeaways

• A perpetual futures contract is a derivative with no expiration date. Unlike traditional futures contracts, it allows traders to keep a position open indefinitely.
• The funding rate is a key mechanism that keeps the contract price close to the spot price of the underlying asset.
• Funding is paid every eight hours. Some perpetual futures contracts pay funding rates every hour.
• Perps allow you to trade with high leverage, up to 100x, which can multiply your profits but also increase the risk of position liquidation.
• The main difference from standard futures is the absence of an expiration date and the use of a funding rate. While a standard futures contract expires on a specific date, a perpetual futures contract can remain open indefinitely.
• The perpetual futures market is one of the most liquid segments of the cryptocurrency market. Daily trading volume reaches billions of dollars.
• You can trade perps on centralized exchanges and in decentralized applications.
• Long and short positions are available. Margin serves as collateral for a perpetual futures position.

What Are Perpetual Futures Contracts?

A perpetual futures contract is a derivative financial instrument that tracks the price of an underlying asset. The underlying asset can be Bitcoin, Ether, gold, a currency, or any other exchange-traded instrument.

The defining feature of perpetual futures is that they have no expiration date, making them a highly convenient derivative. A standard futures contract expires on a predetermined date, after which the position must be closed. With perpetual futures, a position can be held indefinitely.

Perpetual futures emerged in the cryptocurrency market. Bitcoin traders needed a margin trading instrument that would not require them to switch to new contracts every few months. This led to the creation of perpetual Bitcoin futures. BitMEX became the first exchange to launch perpetual futures in 2016. Since then, the market has grown to billions of dollars in trading volume. Today, perpetual futures are available for hundreds of assets, from cryptocurrencies to commodities. The most actively traded pairs are BTC/USDT and ETH/USDT. Perpetual contracts are also available for Solana, XRP, gold, oil, the US dollar, the euro, the Chinese yuan, and even individual stocks.

From a technical perspective, perpetual futures are more similar to perpetual swaps than traditional futures contracts. Traders speculate on whether the price will rise or fall by opening long or short positions. Leverage lets them control larger positions with less capital. The higher the leverage, the greater the potential profit and the greater the risk.

How Do Perpetual Futures Work?

Perpetual futures follow a straightforward pricing mechanism. Their price generally tracks the current market price of the underlying asset. But if a perpetual contract never expires, what keeps its price aligned with the underlying asset?

The answer is the funding rate. Think of it as a balancing mechanism between the spot price and the perpetual contract price. Every eight hours, funding payments help keep the two in line. If the contract price is higher than the spot price, traders who hold long positions pay those with short positions the funding amount. If the contract price is lower than the spot price, short traders pay long traders. This mechanism keeps the contract price closely aligned with the underlying asset around the clock. Traditional futures, by contrast, converge with the underlying asset only at expiration.

The Funding Rate Mechanism

The funding rate involves periodic payments between traders holding long and short positions. The mechanism is ingeniously simple.

When the perp price is above the spot price, long-position holders pay short-position holders. This encourages selling and puts downward pressure on the price. When the perp price is below the spot price, short traders pay long traders, encouraging buying and supporting the perp price.

Funding payments are typically made every eight hours. The funding rate depends on the difference between the perp price and the spot price. The greater the deviation, the higher the funding rate. This creates arbitrage opportunities, allowing traders to profit from both funding payments and price discrepancies. Traders can earn from favorable funding payments or from the convergence of the perpetual futures price toward the price of the underlying asset in contango or backwardation.

The funding rate mechanism serves two purposes:

• keeping the price of a perpetual futures contract close to the spot price;
• allowing perpetual futures to be priced without an expiration date.

Together, these functions improve market efficiency.

The funding rate consists of two components: the premium index and the interest component. The premium index reflects the difference between the perpetual futures price and the spot price, while the interest component is a fixed value set by the exchange.

Example: At a funding rate of 0.01%, a trader holding a $1,000 long position pays $0.10 every eight hours. At an extreme funding rate of 0.3%, the same position costs $3 every eight hours, or $270 per month. Funding payments work both ways: when the funding rate is negative, traders with short positions pay those with long positions.

Margin, Leverage & Mark Price

Margin trading is an integral part of perpetual futures. To open a position, a trader deposits the required margin, which represents a portion of the contract’s value. The exchange provides the remaining exposure through leverage.

The initial capital required to open a position can be small. The less capital a trader commits, the higher the leverage. However, higher leverage also increases the risk of liquidation. If the market moves against the position and the account balance falls below the required maintenance margin, the position may be forcibly closed.

The mark price protects traders from accidental liquidations caused by short-term volatility spikes on a single exchange. It is typically calculated using a weighted average of prices from multiple exchanges.

Proper risk management is essential. Stop-loss and take-profit orders can help reduce the risk of liquidation, while maintaining sufficient margin provides an additional buffer. Experienced traders rarely use leverage above 10x. Beginners are generally better off starting with 5x or less. This allows them to take advantage of market opportunities without taking on excessive risk. Ultimately, potential losses depend on the position size and the trader’s discipline.

Higher leverage may be justified when trading high-priced assets, such as Bitcoin futures. In such cases, opening a position requires a substantial margin deposit. However, the actual risk of the trade depends on the position size and the distance between the entry price and the stop-loss level.

Perpetual Futures vs Traditional Futures Contracts

Key differences between standard and perpetual futures:

• Expiration date. A standard futures contract expires on a predetermined date. A perpetual futures contract has no expiration date, allowing positions to remain open indefinitely. This is the main advantage of perps.
• Price alignment. With standard futures, the contract price converges with the spot price as the expiration date approaches and reflects prevailing interest rates. With perpetual futures, the funding rate acts as an invisible anchor, keeping the contract price close to the spot price. Funding payments are typically settled every eight hours.
• Leverage. Leverage on traditional exchanges is generally limited. By contrast, perpetual futures on crypto exchanges often offer up to 100x leverage. While this appeals to active traders, it also makes sound risk management essential.

Standard and perpetual futures have very different origins. Standard futures have been part of traditional finance for centuries, while perpetual futures are a relatively recent innovation, first introduced in the crypto market just over a decade ago. Today, however, the distinction is becoming less clear, as some traditional exchanges have begun offering perpetual futures contracts.

Risks of Trading Perpetual Futures

Trading perpetual futures involves four main risks.

• Liquidation risk is the most significant. With high leverage, even a 1–2% move against your position can trigger liquidation. As a result, you may lose your entire margin and, in some cases, even owe money to the exchange.
• Funding risk is less obvious but can become costly over time. Funding payments are made every eight hours, and during periods of exceptionally high funding rates, the total cost over a month can exceed the initial margin. This risk is particularly relevant for traders holding long positions in a strongly bullish market.
• Regulatory risk is another important consideration. Regulators such as the US Commodity Futures Trading Commission (CFTC) and authorities in the European Union may restrict access to perpetual futures. Before depositing funds, make sure the platform is authorized to offer these products in your jurisdiction.
• Emotional risk is often overlooked. High leverage can encourage impulsive trading and tempt traders to take larger positions than they originally planned. Stick to your trading plan, use reputable exchanges, and never risk more than 1–2% of your trading capital on a single trade.

Where and How to Trade Perpetual Futures

Choosing the right platform is essential for trading perpetual futures. The security of your funds depends largely on the exchange you use.

Centralized exchanges offer perpetual futures on dozens or even hundreds of assets. When selecting a platform, consider factors such as regulation, trading volume, fees, and liquidity. Active market makers help maintain tight spreads, while strong trading activity allows orders to be executed without slippage.

LiteFinance allows traders to trade perpetual stock contracts. The platform provides real-time information on the funding rate, mark price, and maintenance margin. Stop-loss and take-profit orders can be placed directly through the trading terminal or the Client Profile. Trading is available through the web terminal, desktop application, and mobile app. Commissions start at 0.01%, with leverage of up to 50x.

Before trading with real money, test your strategy in demo mode. LiteFinance lets you try demo mode without registering. Once you are comfortable with the basics, gradually expand your trading to include altcoins. Virtual funds will help you understand how perps work and how to place orders with no risk.

Conclusion

Perpetual futures have transformed the way people trade. They combine the flexibility of the spot market with the benefits of margin trading. Instead of an expiration date, they rely on a funding mechanism, while leverage allows traders to control larger positions with less capital.

At the same time, higher leverage means higher risk. Effective risk management, adequate margin, and disciplined trading are essential. Take the time to understand how funding works, how liquidations occur, and test your strategy on a demo account before risking real money.

Ready to get started? Try LiteFinance’s demo mode with no registration required. Find the BTC/USDT Perpetual contract in the trading terminal, check the funding rate, and place your first virtual trade. The market rewards those who are prepared.