Perpetual swaps, also called perpetual futures or perpetual contracts, are crypto derivatives that let traders speculate on the price of an asset without owning it directly.
Unlike traditional futures contracts, perpetual swaps do not have an expiry date. A trader can keep a position open as long as there is enough margin to support it and the contract remains available for trading.
Perpetual contracts are widely used in crypto for long and short trading, leverage, hedging, and arbitrage. They also have a special funding mechanism that helps keep the contract price close to the spot price of the underlying asset.
What Is a Perpetual Swap?
A perpetual swap is a derivative contract that tracks the price of an underlying asset, such as Bitcoin or Ethereum.
When you trade a perpetual contract, you are not buying the actual cryptocurrency. Instead, you are opening a position based on whether you expect its price to rise or fall.
For example, if Bitcoin is trading at $100,000, a trader could open a BTC perpetual position expecting the price to increase. If Bitcoin rises, the position can generate a profit. If it falls, the trader can lose money.
The main difference from traditional futures is that perpetual contracts do not have a fixed expiration date. This allows traders to keep positions open without having to roll them into a new contract when an expiry date arrives.
How Do Perpetual Swaps Work?
Perpetual swaps use several mechanisms to keep the market functioning and the contract price close to the underlying spot market.
The main components are:
- Margin — collateral deposited to open and maintain a position.
- Leverage — allows traders to control a larger position with less capital.
- Funding rates — periodic payments between long and short traders.
- Mark price — a reference price used by exchanges to calculate unrealized profit and loss and, in many markets, trigger liquidations.
- Liquidation — the forced closing of a position when available margin falls below the required level.
These mechanisms work together to manage leveraged positions and keep perpetual prices close to spot prices.
What Are Long and Short Positions?
Perpetual swaps allow traders to profit from either rising or falling prices.
Long Position
A long position means the trader expects the asset’s price to increase. For example, if Bitcoin is trading at $100,000 and a trader opens a long position, the position gains value if Bitcoin rises to $105,000, before fees and funding. If Bitcoin falls instead, the trader loses money.
Short Position
A short position means the trader expects the asset’s price to decrease. For example, if Bitcoin is trading at $100,000 and a trader opens a short position, the position gains value if Bitcoin falls to $95,000, before fees and funding. If Bitcoin rises, the short position loses money.
This ability to trade in both directions is one reason perpetual contracts are used for both speculation and hedging.
What Is Leverage in Perpetual Trading?
Leverage allows traders to control a position larger than the amount of collateral they deposit. A trader with $1,000 in margin could use 10x leverage to open a position worth $10,000.
If the underlying asset moves 5% in the trader’s favor, the position could gain about $500 before fees and funding. A 5% move against the trader would create a similar loss.
The important point is that leverage increases both potential gains and losses. Higher leverage also means a smaller adverse price movement can cause liquidation.
What Is a Funding Rate?
The funding rate is a periodic payment exchanged between traders holding long and short positions.
It exists because perpetual contracts have no expiration date. Traditional futures can naturally converge toward the spot price as they approach expiration, but perpetual contracts need another mechanism to keep their prices aligned. Funding provides that mechanism.
The basic rule is:
- Positive funding rate: Long traders pay short traders.
- Negative funding rate: Short traders pay long traders.
When a perpetual contract trades above the spot price, funding will generally become positive. When it trades below the spot price, funding will generally become negative.
Funding rates and payment intervals vary between exchanges, so traders should check the specific contract they are using rather than assuming every platform uses the same schedule.
How Are Funding Fees Calculated?
The basic funding-fee calculation is:
Funding Fee = Position Value × Funding Rate
According to Coinbase’s funding fee guide, the funding fee is calculated based on the position size and applicable funding rate. For example, suppose a trader has a $10,000 position, and the funding rate is 0.01%.
The funding payment would be:
$10,000 × 0.01% = $1
If the funding rate is positive, the long position would pay the short side. If the rate is negative, the short position would pay the long side.
The actual calculation can vary between exchanges because platforms use different funding formulas, intervals, and rate limits.
What Is Mark Price?
The mark price is a reference price used by exchanges to help calculate the value of a perpetual position.
It is generally based on the underlying spot market and other pricing inputs rather than simply using the latest trade on one exchange.
This matters because the mark price determines unrealized profit and loss and triggers liquidations. On some exchanges, the last traded price shown on the chart can differ from the mark price the liquidation system uses.
This is why a trader may see a chart price above their liquidation level even after their position has been liquidated.
Understanding Liquidation
Liquidation occurs when a trader no longer has enough margin to maintain a leveraged position.
Suppose a trader opens a highly leveraged Bitcoin long. If Bitcoin falls sharply, the trader’s available margin decreases. Once the position reaches the exchange’s liquidation requirements, the exchange can automatically close the position.
Liquidation can result in the trader losing most or all of the margin assigned to the position.
The exact liquidation price depends on factors such as:
- Leverage
- Position size
- Entry price
- Margin
- Maintenance-margin requirements
- Funding payments
- Trading fees
- Margin mode
Higher leverage generally leaves less room for the market to move against a position before liquidation becomes possible.
Isolated Margin vs. Cross Margin
Perpetual exchanges commonly offer different margin modes.
Isolated Margin
With isolated margin, a specific amount of collateral is assigned to a position. If the position is liquidated, the loss is generally limited to the margin assigned to that position, subject to the exchange’s rules.
Cross Margin
With cross margin, available collateral in the relevant account can be used to support open positions. This can give a position more room before liquidation, but it can also expose more of the account’s available collateral to losses.
The exact rules vary by exchange, so traders should understand the platform’s margin system before opening a position.
Perpetual Swaps vs. Traditional Futures
Perpetual swaps and traditional futures are both derivatives, but they have an important structural difference.
| Feature | Perpetual Swaps | Traditional Futures |
| Expiration | No expiry, positions can stay open | Has a fixed end date |
| Price Alignment | Uses funding payments to stay close to the market price | Matches spot price at expiry |
| Settlement | Ongoing adjustments through funding | Settled when the contract ends |
| Ease of Use | Easier for most retail traders | More complicated for beginners |
| Flexibility | Very flexible for continuous trading | Less flexible due to expiry dates |
Table 1. Perpetual Swaps vs. Traditional Futures at a Glance
Traditional futures have an expiration date. Perpetual contracts do not, so funding payments are used to help keep their prices close to the underlying asset.
Why Do Traders Use Perpetual Swaps?
Perpetual contracts are used for several reasons, from speculating on price movements to hedging existing positions and gaining leveraged market exposure.
Speculation
Traders can take long or short positions based on their expectations about an asset’s price direction, allowing them to potentially profit from both rising and falling markets.
Hedging
A trader holding Bitcoin could use a short perpetual position to offset some downside risk without selling the underlying Bitcoin.
Leverage
Traders can gain larger market exposure with less initial capital, although this also increases risk.
Arbitrage
Traders can compare prices and funding rates across spot and derivatives markets and use different positions to capture price or funding differences.
Short Exposure
Perpetual contracts let you take a bearish position without borrowing and selling the underlying cryptocurrency directly.
What Are the Risks of Perpetual Swaps?
Perpetual contracts carry more risk than simply buying and holding cryptocurrency because leverage can magnify losses.
Liquidation Risk
A relatively small price movement can trigger liquidation when high leverage is used, as losses can quickly reduce the margin supporting the position.
Funding Costs
Funding can become an ongoing expense if the position remains open while the trader is paying the other side, adding to the overall cost of the trade.
Market Volatility
Crypto prices can move sharply in short periods, increasing the chance of large gains or losses and making leveraged positions harder to manage.
Exchange Risk
Traders depend on the exchange or protocol to execute orders, manage collateral, and process withdrawals.
Liquidity Risk
Low-liquidity contracts can experience larger spreads and price movements, making positions harder to enter or close.
Counterparty and Platform Risk
Different derivatives platforms have different insurance funds, liquidation systems, custody arrangements, and risk controls.
Perpetual Swaps on Centralized vs. Decentralized Exchanges
Perpetual contracts are available through both centralized exchanges and decentralized protocols.
- Centralized exchanges (CEXs) generally manage the trading engine, custody, and liquidation system. They may offer high liquidity, multiple margin modes, and advanced order types.
- Decentralized exchanges (DEXs) use smart contracts and blockchain infrastructure to manage trading and settlement. Traders may retain greater control over their wallets, but they also face smart-contract, oracle, and blockchain risks.
The available assets, leverage limits, funding mechanisms, and liquidation rules vary by platform.
How to Trade Perpetual Swaps
The exact process differs between platforms, but the general steps are:
- Choose a derivatives platform. Check availability in your country and review its fees and rules.
- Deposit collateral. Add the assets accepted as margin.
- Select a perpetual contract. For example, BTC/USDT perpetual.
- Choose your margin mode. Select isolated or cross margin if the platform offers both.
- Set your position size and leverage. Avoid using more leverage than you can manage.
- Choose long or short. A long position benefits from rising prices, while a short position benefits from falling prices.
- Review the liquidation price. Check how much room the position has before liquidation.
- Monitor funding. Funding payments can affect your position while it remains open.
- Close the position. Closing the trade realizes the position’s profit or loss, excluding applicable fees and funding.
The Difference Between Perpetual Swaps and Spot Trading
Spot trading involves buying or selling the underlying cryptocurrency, meaning the trader owns the asset after completing the purchase. With a perpetual contract, the trader instead holds a derivative position that tracks the price of the underlying cryptocurrency without owning it directly.
Perpetual contracts can also offer leverage and allow traders to take short positions, while spot trading does not typically involve liquidation unless leverage is used through a separate trading arrangement.
What Comes Next
Perpetual swaps remain an important part of the crypto derivatives market because they combine continuous trading with long and short exposure. Their main mechanics are straightforward once traders understand the relationship between margin, leverage, funding, mark price, and liquidation.
Before using a perpetual contract, check the specific platform’s rules rather than relying on general assumptions. Funding intervals, leverage limits, liquidation systems, and eligible assets can differ between exchanges.
For beginners, understanding how much can be lost before opening a position is more important than focusing only on potential returns.
Frequently Asked Questions
Need a refresher on perpetual swaps? Here are some of the most common questions traders ask.
Are perpetual swaps the same as futures?
They are similar, but not identical. Both are derivatives that allow traders to speculate on an asset’s price. Traditional futures have an expiration date, while perpetual swaps do not. Perpetual contracts use funding payments to help keep their prices close to the spot market.
Can you hold a perpetual swap forever?
There is no scheduled expiration date for a perpetual contract, so a position can remain open indefinitely in principle. However, the trader must continue meeting margin requirements and account for funding payments, fees, and the platform’s rules.
Do you need to own Bitcoin to trade a Bitcoin perpetual?
No. A Bitcoin perpetual is a derivative based on Bitcoin’s price. Traders can take long or short positions without holding the underlying Bitcoin.
Who pays the funding rate?
Funding payments are exchanged between long and short traders. When funding is positive, longs generally pay shorts. When funding is negative, shorts generally pay longs.
Is funding a fee charged by the exchange?
Generally, funding is a payment between traders rather than a normal trading fee charged by the exchange. However, the exact settlement process depends on the platform.
Can perpetual swaps be liquidated?
Yes. If a leveraged position no longer meets the platform’s margin requirements, it can be liquidated. The exchange may use the mark price rather than the latest traded price to determine when liquidation occurs.
Are perpetual swaps risky?
Yes. Leverage can magnify both profits and losses, and a relatively small price movement against a highly leveraged position can lead to liquidation. Funding payments and trading fees can also reduce returns.
Can beginners trade perpetual swaps?
Beginners can access perpetual markets on some platforms, but understanding leverage, margin, funding, liquidation, and platform rules is important before using real money. Perpetual contracts can produce losses quickly, particularly when high leverage is used.
