What is the difference between a perpetual contract and a futures contract?

Understanding the Core Nature of Derivatives in Cryptocurrency

In the cryptocurrency trading ecosystem, derivatives play a pivotal role in enabling traders to speculate on price movements without owning the underlying asset. Among the most widely used derivatives are perpetual contracts and futures contracts. Both allow traders to go long or short on assets such as Bitcoin or Ethereum, but they operate under distinct mechanisms. The primary difference lies in their expiration structure and funding mechanisms. While futures contracts have a fixed settlement date, perpetual contracts do not expire, allowing positions to be held indefinitely—provided margin requirements are met.

Defining Futures Contracts in Crypto Markets

A futures contract is an agreement to buy or sell a specific cryptocurrency at a predetermined price on a set future date. These contracts are standardized and traded on regulated exchanges such as Binance Futures, Bybit, or OKX. When a futures contract reaches its expiration, it must be settled either through cash settlement or physical delivery, depending on the exchange and contract type. For example, a BTCUSD quarterly futures contract may expire in three months, requiring traders to close, roll over, or let the position settle automatically.

Traders use futures to hedge against price volatility or to speculate on directional moves. The existence of an expiration date means that traders must manage their positions ahead of settlement. This often involves rolling over positions into a new contract series, which can incur transaction costs and slippage. The pricing of futures contracts typically reflects the spot price plus a premium or discount known as basis, influenced by interest rates and market sentiment.

How Perpetual Contracts Operate Without Expiry

Unlike traditional futures, perpetual contracts do not have an expiration date. This allows traders to maintain open positions for as long as they wish, assuming they meet the maintenance margin requirements. These contracts were popularized by BitMEX and are now offered by nearly every major crypto derivatives exchange. The absence of expiry makes perpetuals particularly appealing for traders seeking long-term exposure without the hassle of contract rollovers.

To ensure that the price of the perpetual contract remains closely aligned with the underlying spot price, a mechanism called funding rate is employed. The funding rate is exchanged periodically (usually every 8 hours) between long and short positions. If the perpetual contract trades above the spot price, the funding rate becomes positive, meaning longs pay shorts. Conversely, if the contract trades below spot, shorts pay longs. This incentivizes traders to bring the contract price back in line with the index price.

Key Differences in Margin and Leverage Structures

Both perpetual and futures contracts support leverage, enabling traders to control large positions with relatively small capital. However, the margin systems can differ slightly depending on the platform and contract type. In most cases, both contract types use isolated or cross margin modes. Isolated margin limits risk to a specific amount allocated to the position, while cross margin uses the entire balance as collateral.

One notable distinction is in liquidation mechanics. Due to the continuous nature of perpetual contracts and the influence of funding rates, liquidation risks can be more dynamic. For instance, during periods of high volatility or extreme funding rates, positions in perpetuals may face higher chances of liquidation if the price moves sharply against the trader. Futures contracts, especially those nearing expiration, may exhibit different volatility patterns due to pin risk—the uncertainty of price movement right before settlement.

Practical Steps to Trade Perpetual vs. Futures Contracts

To trade either contract type on a platform like Bybit or Binance, follow these steps:

• Log in to your exchange account and navigate to the derivatives or futures trading section
• Select the desired cryptocurrency pair (e.g., BTC/USDT)
• Choose between futures (with expiry) or perpetual (no expiry) from the contract type menu
• Set your leverage level using the slider or input field—common options range from 1x to 125x
• Decide between isolated or cross margin mode based on your risk tolerance
• Place your order using limit, market, or stop-limit options
• Monitor the funding rate if trading a perpetual, as it affects holding costs
• For futures, keep track of the countdown to expiration and plan for rollover if needed

It is crucial to understand that liquidation price is calculated differently depending on the contract and margin mode. Always verify this value before entering a trade.

Settlement and Market Impact Differences

Settlement procedures highlight a major divergence between the two instruments. Futures contracts settle automatically at expiration based on a mark price, usually derived from a time-weighted average of the spot price. Traders who fail to close their positions before expiry will have them settled by the exchange, which could lead to unexpected outcomes if not anticipated.

In contrast, perpetual contracts never settle, allowing uninterrupted trading. However, the funding mechanism introduces a recurring cost or income stream. Traders holding long positions in a high-funding environment may see their profits eroded over time, even if the price moves in their favor. Similarly, short sellers in a negative funding environment receive payments, which can enhance returns.

Market depth and liquidity also vary. Perpetual contracts, especially on major pairs like BTC/USD, often exhibit deeper order books due to higher trading volumes. Futures contracts, particularly those with distant expiries, may have lower liquidity, leading to wider spreads and increased slippage during execution.

Frequently Asked Questions

Can I convert a futures contract into a perpetual contract on the same exchange?No, you cannot directly convert one contract type into another. You must close your futures position and open a new perpetual position separately. This involves two distinct transactions and may result in price slippage and fees.

How often is the funding rate applied in perpetual contracts?The funding rate is typically applied every 8 hours on most exchanges. Common settlement times are at 00:00 UTC, 08:00 UTC, and 16:00 UTC. The exact timing is displayed on the trading interface.

Do futures contracts always require physical delivery?No, most crypto futures are cash-settled. This means the profit or loss is paid in the quote currency (e.g., USDT or USD) rather than delivering the actual cryptocurrency. Physical delivery futures exist but are less common on retail platforms.

What happens if I hold a futures contract past its expiration?The exchange will automatically settle the contract at the final settlement price. Your position will be closed, and any profit or loss will be credited or debited to your account. It is advisable to close or roll over the position manually to maintain exposure.