What Is a Perpetual Futures Contract? #
A perpetual futures contract (often just called a “perpetual” or “perp”) is a derivative contract that lets traders speculate on the price of an underlying asset without ever having to take delivery of it — and, unlike standard futures, without an expiration date.
Perpetuals are most widely used in cryptocurrency markets, where they have become one of the dominant instruments for both spot-price speculation and hedging.
Perpetual vs. Standard Futures #
A standard futures contract has a fixed expiration date. When that date arrives, the contract is settled, either through physical delivery of the asset or a cash settlement.
A perpetual futures contract removes this expiration entirely. Traders can hold a position open indefinitely, as long as they maintain the required margin. This design makes perpetuals behave more like a continuously rolling position than a dated contract.
The Problem Perpetuals Had to Solve #
Without an expiration date, a natural question arises: what keeps the price of a perpetual contract close to the price of the underlying asset in the spot market?
In a standard futures contract, the price converges to the spot price as expiration approaches, because the contract must eventually settle. A perpetual contract has no such settlement event to force this convergence.
To solve this, perpetual contracts use a mechanism called the funding rate.
What Is the Funding Rate? #
The funding rate is a periodic payment exchanged directly between traders holding long positions and traders holding short positions. It is not a fee paid to the exchange.
- When the perpetual contract’s price trades above the spot price, long position holders pay short position holders.
- When the perpetual contract’s price trades below the spot price, short position holders pay long position holders.
This payment is typically exchanged every 8 hours, though the exact interval depends on the exchange.
How the Funding Rate Keeps Prices Aligned #
The funding rate creates a financial incentive that pushes the contract’s price back toward the spot price.
If the perpetual price rises well above the spot price, longs must pay a funding fee to shorts. This makes holding long positions more costly, which discourages new long positions and encourages some traders to close existing ones or open short positions instead — pushing the price back down toward spot.
The same mechanism works in reverse when the perpetual price falls below the spot price.
Key Characteristics of Perpetual Futures #
- No expiration date
- Positions can be held indefinitely, subject to margin requirements
- Price is kept close to the spot price through the funding rate mechanism
- Usually offer high leverage
- Commonly used with both long and short positions
- Widely available on cryptocurrency exchanges; less common in traditional regulated markets
Practical Considerations #
Funding payments can meaningfully affect the profitability of a position, especially when it is held open for an extended period. A position that is directionally correct can still lose money over time if funding payments accumulate against it.
For this reason, traders using perpetual contracts for longer-term positions need to account for funding costs, not just the price movement of the underlying asset.
Conclusion #
A perpetual futures contract is a derivative instrument that allows traders to hold a position with no expiration date, while a funding rate mechanism keeps its price aligned with the underlying spot market. Understanding how the funding rate works — and who pays whom, and when — is essential before using perpetual contracts in any trading strategy.
One-Sentence #
A perpetual futures contract has no expiration date and relies on a periodic funding rate exchanged between long and short traders to keep its price aligned with the spot market.