What is the difference between futures and perpetual ETH contracts?

Differences Between Futures and Perpetual ETH Contracts

1. Traditional futures contracts for Ethereum (ETH) are time-bound agreements that obligate the buyer to purchase or sell ETH at a predetermined price on a specified future date. These contracts have an expiration, meaning traders must either settle, roll over, or close their positions before the contract expires.

2. Perpetual contracts, in contrast, do not have an expiration date. This allows traders to hold their long or short positions indefinitely as long as they maintain sufficient margin and avoid liquidation. This feature makes perpetuals particularly appealing for speculative trading without the need to manage rollover costs.

3. Funding rates are a defining characteristic of perpetual contracts. To keep the contract price aligned with the spot market, exchanges implement periodic payments between long and short positions. When the perpetual trades above spot price, longs pay shorts; when below, shorts pay longs. This mechanism ensures price convergence without requiring expiry.

4. Futures contracts typically rely on settlement via physical delivery or cash settlement upon expiry. They often mirror institutional-grade instruments and may be used for hedging real-world exposure. Perpetuals, however, are purely synthetic and designed primarily for leveraged speculation within crypto-native environments.

5. The liquidity structure differs significantly. Perpetual markets on major exchanges like Binance or Bybit tend to exhibit deeper order books and tighter spreads due to higher trading volumes and continuous interest from retail traders. Futures markets, especially quarterly ones, can experience reduced liquidity closer to expiry unless actively rolled.

Risk and Leverage Considerations

1. Both contract types allow high leverage, sometimes exceeding 100x on certain platforms. However, perpetual contracts expose traders to ongoing funding fees, which can accumulate over time and erode profits or amplify losses during volatile sideways markets.

2. Because futures have fixed maturities, traders face basis risk—the difference between futures and spot prices—especially as expiry approaches. This can create opportunities for arbitrage but also increases complexity in position management.

3. Liquidation risks are present in both models, but perpetuals introduce additional pressure through funding rate dynamics. In strong trending markets, one-sided positioning can lead to extreme funding rates, effectively taxing the majority side and incentivizing contrarian trades.

4. Margin requirements vary by platform and contract type. Some exchanges apply isolated margining to perpetuals, limiting loss to the allocated amount, while futures might use cross-margin systems that pull from overall account equity.

5. The absence of expiry in perpetuals means traders must actively monitor funding outflows and cumulative costs, which are invisible in traditional futures. This hidden cost can mislead inexperienced users into believing they are avoiding rollover fees when they're actually paying through funding.

Use Cases and Market Behavior

1. Institutional investors often prefer ETH futures listed on regulated venues such as CME because they offer audit trails, compliance frameworks, and integration with traditional portfolios. These contracts serve as tools for macro hedging and regulatory reporting.

2. Retail traders dominate perpetual markets due to ease of access, 24/7 availability, and aggressive marketing of zero-expiry benefits. Platforms promote perpetuals as 'always-on' trading vehicles ideal for day trading and swing strategies.

3. Arbitrageurs exploit pricing discrepancies between perpetuals and spot or futures markets. For example, if a perpetual trades at a persistent premium, traders might short it and hedge with spot ETH, earning funding payments while waiting for convergence.

4. Market manipulation concerns are more pronounced in perpetuals due to concentrated open interest and opaque funding mechanisms. Flash crashes or squeezes can trigger cascading liquidations, exacerbated by uniform leverage settings across user bases.

5. Perpetuals reflect sentiment more immediately than futures, acting as real-time barometers of bullish or bearish momentum within the crypto ecosystem. Their responsiveness makes them valuable indicators despite structural complexities.

Frequently Asked Questions

How is the price of a perpetual contract kept close to the underlying asset?Through the funding rate mechanism, which transfers payments between long and short holders. If the perpetual price deviates from the index price, the funding rate adjusts to incentivize traders to bring it back in line.

Can futures contracts be traded after expiration?No, once a futures contract reaches its expiration date, it ceases trading and undergoes settlement. Traders must close or roll their positions into a new contract cycle before this occurs.

Do all exchanges charge funding rates on perpetuals?Yes, virtually all major exchanges implementing perpetual contracts use funding rates. The frequency varies—some every 8 hours, others hourly—but the purpose remains consistent: pegging contract price to spot value.

Why do some traders prefer quarterly futures over perpetuals?Quarterly futures eliminate recurring funding costs and provide clarity around expiry. They are favored by those seeking predictable timelines and alignment with institutional trading patterns.