Perpetual futures, also called perpetual swaps or perps, are derivative contracts that resemble futures contracts but have no expiry date. A trader can hold a long or short position indefinitely, as long as the margin requirements are met. Because there is no maturity date at which the contract converges with the underlying asset, the price is kept close to the spot market by a funding mechanism: periodic payments between holders of long and short positions.
Perpetual futures are the most heavily traded instrument in cryptocurrency markets, where daily volumes often exceed spot trading. They are usually margined and settled in a stablecoin such as Tether (USDT) or in the underlying cryptocurrency, and allow high leverage.
History
The economist Robert Shiller proposed perpetual futures in academic work in the early 1990s as a way to trade assets, such as real estate indices, that lack a convenient cash market. The design became commercially significant in 2016, when the crypto exchange BitMEX launched a perpetual contract on bitcoin. Other centralized exchanges followed, and later decentralized exchanges introduced on-chain perpetuals. Most of this trading takes place on offshore venues that do not accept customers from the United States, where futures trading is regulated by the Commodity Futures Trading Commission.
How perpetual futures work
A trader opens a position by posting margin, a fraction of the notional amount of the contract. With 10x leverage, for example, USD 1,000 of margin controls a USD 10,000 position. Profits and losses are credited and debited continuously as the price moves.
The funding rate
The funding mechanism ties the contract to the spot price. At set intervals, commonly every eight hours, the exchange compares the perpetual price with an index of spot prices. If the perpetual trades above the index, the funding rate is positive and longs pay shorts; if it trades below, the rate is negative and shorts pay longs. These payments make it expensive to hold the crowded side of the market and encourage arbitrage traders to buy spot and sell perpetuals, or the reverse, pulling the prices together. Funding rates are often quoted in percent or basis points per interval.
Mark price and liquidation
Exchanges calculate unrealized profit and loss using a mark price based on the spot index, to limit manipulation. If losses reduce a position's margin below the maintenance requirement, the trader receives the equivalent of a margin call; in practice, most crypto venues liquidate the position automatically. Insurance funds absorb losses when liquidated positions cannot be closed at a price that covers the debt, and, in extreme moves, some exchanges use auto-deleveraging, closing profitable opposing positions.
Example
A trader buys a bitcoin perpetual with a notional value of USD 50,000 using USD 5,000 of margin. If bitcoin rises 4 percent, the position gains about USD 2,000, a 40 percent return on margin. If the funding rate is 0.01 percent per eight hours and positive, the trader pays about USD 5 to short holders at each interval. If bitcoin instead falls roughly 9 to 10 percent, the margin is largely exhausted and the position is liquidated.
Perpetual futures compared with dated futures
Traditional futures and forward contracts have a fixed settlement date, so traders who want ongoing exposure must roll positions, and the gap between futures and spot, the basis, narrows as expiry approaches. Perpetuals avoid rolling and track spot more closely, but holders pay or receive funding instead. Like options and other derivatives, they can be used for hedging as well as speculation.
Risks and criticism
High leverage makes perpetual futures a major source of forced selling in crypto markets, since cascades of liquidations can amplify price moves. Traders also face exchange counterparty risk, as the 2022 collapse of FTX showed, and the risk of sudden changes to margin rules. Regulators in several jurisdictions restrict or ban the offering of leveraged crypto derivatives to retail customers.