Cryptocurrency Contract Primer: What is the Difference Between Perpetual and Futures Contracts?

Perpetual contracts, with no expiration and a funding rate, suit short-term trading, while futures contracts, with set expiration dates, are ideal for hedging and long-term speculation.

Jun 12, 2025 at 09:43 am

In the world of cryptocurrencies, trading contracts have become an essential tool for both seasoned and novice traders. Among the various types of contracts available, perpetual and futures contracts stand out due to their unique characteristics and trading mechanisms. Understanding the differences between these two types of contracts is crucial for anyone looking to engage in cryptocurrency trading effectively. This article aims to provide a comprehensive overview of perpetual and futures contracts, highlighting their key differences and how they function within the cryptocurrency market.

What Are Futures Contracts?

Futures contracts are agreements to buy or sell an asset, such as a cryptocurrency, at a predetermined price on a specified future date. These contracts are standardized and traded on regulated exchanges. The primary purpose of futures contracts is to hedge against price volatility and speculate on future price movements.

In the context of cryptocurrencies, a trader might enter into a futures contract to buy Bitcoin at a set price in three months. If the price of Bitcoin rises above the agreed-upon price by the contract's expiration date, the buyer profits. Conversely, if the price falls below the agreed-upon price, the buyer incurs a loss.

Futures contracts have an expiration date, which means they must be settled or rolled over into a new contract before the expiration. This aspect of futures contracts requires traders to be mindful of the contract's lifecycle and plan their trading strategies accordingly.

What Are Perpetual Contracts?

Perpetual contracts, also known as perpetual swaps, are a type of derivative that allows traders to speculate on the price of an asset without an expiration date. Unlike futures contracts, perpetual contracts do not have a settlement date, which means they can be held indefinitely.

Perpetual contracts are designed to closely track the underlying asset's price through a mechanism called the funding rate. The funding rate is periodically paid between long and short positions to ensure the perpetual contract's price remains aligned with the spot price of the asset. If the funding rate is positive, long positions pay short positions, and if it's negative, short positions pay long positions.

This unique feature of perpetual contracts makes them a popular choice among traders who want to maintain long-term positions without worrying about rolling over contracts or dealing with expiration dates.

Key Differences Between Perpetual and Futures Contracts

The fundamental difference between perpetual and futures contracts lies in their expiration dates. Futures contracts have a set expiration date, requiring traders to settle or roll over their positions, whereas perpetual contracts do not expire and can be held indefinitely.

Another key difference is the funding rate mechanism in perpetual contracts. This mechanism does not exist in futures contracts, which instead use a settlement process at expiration. The funding rate helps keep perpetual contracts aligned with the spot price, while futures contracts may deviate from the spot price as the expiration date approaches.

Additionally, trading strategies for perpetual and futures contracts can differ significantly. Futures contracts are often used for hedging and long-term speculation due to their fixed expiration dates. In contrast, perpetual contracts are favored for short-term trading and leveraged positions because of their flexibility and continuous nature.

Trading Perpetual Contracts: A Step-by-Step Guide

To trade perpetual contracts, follow these steps:

• Choose a Platform: Select a reputable cryptocurrency exchange that offers perpetual contracts, such as Binance or Bybit.
• Create an Account: Register and complete the necessary verification processes to access trading features.
• Deposit Funds: Fund your account with the required cryptocurrency or fiat currency to begin trading.
• Navigate to Perpetual Contracts: Find the section of the exchange dedicated to perpetual contracts.
• Select an Asset: Choose the cryptocurrency you wish to trade, such as Bitcoin or Ethereum.
• Set Your Position: Decide whether you want to take a long (buy) or short (sell) position based on your market analysis.
• Determine Leverage: Set your desired leverage level, keeping in mind that higher leverage increases both potential profits and risks.
• Place Your Order: Enter your order details, including the amount and price, and submit it to the market.
• Monitor the Funding Rate: Keep an eye on the funding rate, as it will affect your position's profitability over time.
• Manage Your Position: Use stop-loss and take-profit orders to manage your risk and secure profits.

Trading Futures Contracts: A Step-by-Step Guide

To trade futures contracts, follow these steps:

• Choose a Platform: Select a reputable cryptocurrency exchange that offers futures contracts, such as CME or Binance Futures.
• Create an Account: Register and complete the necessary verification processes to access trading features.
• Deposit Funds: Fund your account with the required cryptocurrency or fiat currency to begin trading.
• Navigate to Futures Contracts: Find the section of the exchange dedicated to futures contracts.
• Select an Asset: Choose the cryptocurrency you wish to trade, such as Bitcoin or Ethereum.
• Select a Contract: Pick a futures contract with an expiration date that aligns with your trading strategy.
• Set Your Position: Decide whether you want to take a long (buy) or short (sell) position based on your market analysis.
• Determine Leverage: Set your desired leverage level, keeping in mind that higher leverage increases both potential profits and risks.
• Place Your Order: Enter your order details, including the amount and price, and submit it to the market.
• Monitor the Contract: Keep track of the contract's expiration date and plan your exit strategy accordingly.
• Settle or Roll Over: Before the contract expires, decide whether to settle the contract or roll it over into a new one.

Risk Management in Perpetual and Futures Contracts

Effective risk management is crucial when trading both perpetual and futures contracts. Leverage is a double-edged sword that can amplify both gains and losses. Traders should use leverage cautiously and always have a clear risk management strategy in place.

Stop-loss orders are essential tools for limiting potential losses. These orders automatically close a position when the market moves against it, preventing further losses. Similarly, take-profit orders can be used to lock in profits when the market moves in your favor.

For futures contracts, traders must also consider the expiration date and plan their exit strategies accordingly. Rolling over contracts can incur additional costs and risks, so it's important to weigh the benefits and drawbacks of this approach.

In perpetual contracts, the funding rate is a critical factor to monitor. A high funding rate can erode profits over time, so traders should adjust their positions based on the funding rate's impact on their overall profitability.

Frequently Asked Questions

Q1: Can I trade perpetual and futures contracts on the same platform?

A1: Yes, many cryptocurrency exchanges offer both perpetual and futures contracts on the same platform. However, the availability of specific contracts can vary between exchanges, so it's important to check the offerings of each platform before trading.

Q2: How does the funding rate affect my perpetual contract position?

A2: The funding rate is periodically exchanged between long and short positions to keep the perpetual contract's price aligned with the spot price. If you hold a long position and the funding rate is positive, you will pay the funding rate to short positions. Conversely, if you hold a short position and the funding rate is negative, you will receive the funding rate from long positions. The funding rate can significantly impact the profitability of your position over time.

Q3: What happens if I hold a futures contract until its expiration date?

A3: If you hold a futures contract until its expiration date, you will need to settle the contract. This can be done by either taking delivery of the underlying asset or settling the contract in cash, depending on the terms of the contract and the exchange's rules. Alternatively, you can roll over the contract into a new one before the expiration date, which involves closing the current contract and opening a new one with a later expiration date.

Q4: Are perpetual contracts more suitable for short-term trading than futures contracts?

A4: Yes, perpetual contracts are often more suitable for short-term trading due to their lack of an expiration date and the flexibility they offer. Traders can enter and exit positions without worrying about rolling over contracts or dealing with expiration dates, making them ideal for short-term strategies. Futures contracts, on the other hand, are better suited for longer-term hedging and speculation due to their fixed expiration dates.