How do perpetual contracts differ from traditional futures contracts?

Perpetual contracts allow indefinite holding with no expiry, using funding rates to align with spot prices, unlike traditional futures that settle at expiration.

Aug 11, 2025 at 09:09 am

Understanding the Core Structure of Perpetual Contracts

Perpetual contracts, often referred to as perpetual swaps, are a unique derivative product designed specifically for cryptocurrency markets. Unlike traditional futures, they do not have an expiration date or a settlement date. This allows traders to hold positions indefinitely, provided they meet margin requirements and funding payments. The absence of expiration eliminates the need to roll over contracts, a common practice in traditional futures trading. This structure is particularly advantageous in volatile markets where continuous exposure is desired. The mechanism that enables this infinite holding period is the funding rate system, which aligns the price of the perpetual contract with the underlying asset’s spot price.

Key Differences in Settlement Mechanism

One of the most significant distinctions lies in how settlement is handled. Traditional futures contracts are settled at expiration, either through physical delivery of the asset or cash settlement based on the final reference price. In contrast, perpetual contracts never settle in the conventional sense. Instead, they rely on mark price and index price mechanisms to prevent manipulation and maintain alignment with real-world asset values. The mark price is used to determine liquidation levels and is often derived from the average of major spot exchange prices. This ensures that even without an expiration, the contract remains tethered to actual market conditions.

Funding Rates vs. Time-Based Expiry

The funding rate is a critical feature exclusive to perpetual contracts. It is a periodic payment exchanged between long and short positions, typically every 8 hours, designed to tether the contract price to the spot price. If the perpetual contract trades above the spot price, longs pay shorts; if below, shorts pay longs. This mechanism replaces the role of time decay and convergence seen in traditional futures, where the futures price naturally converges to the spot price as expiration approaches. Without this funding mechanism, perpetuals would drift significantly from the underlying asset’s value. The rate is calculated using the difference between the index price and the mark price, along with an interest rate component, though the latter is often negligible in crypto markets.

Margin and Leverage Considerations

Both perpetual and traditional futures allow for leverage trading, but the margin systems differ in execution. In perpetual contracts, traders can open positions with as little as 1% or even 0.5% margin, depending on the exchange and asset. However, due to the indefinite nature of the contract, maintenance margin and liquidation thresholds are continuously monitored. Exchanges use isolated or cross-margin modes to manage risk. Isolated margin limits risk to the allocated amount, while cross-margin uses the entire account balance. Traditional futures, by comparison, often require daily margin adjustments and are subject to variation margin calls as prices fluctuate. The continuous nature of perpetuals demands real-time risk assessment, making automated liquidation engines essential.

Operational Workflow of Opening a Perpetual Position

To open a perpetual contract position, a trader must follow several precise steps:

• Navigate to a cryptocurrency derivatives exchange such as Bybit, Binance Futures, or OKX
• Select the desired trading pair, for example, BTC/USDT Perpetual
• Choose between isolated or cross-margin mode based on risk tolerance
• Set the leverage level, such as 10x or 25x, using the leverage slider
• Decide between long (betting on price increase) or short (betting on price decrease)
• Enter the contract size or amount in USDT or coin value
• Confirm the order type: market order for immediate execution or limit order to specify price
• Review the estimated liquidation price and maintenance margin ratio before submission

Once the position is open, the trader must monitor the funding rate clock and account for upcoming payments. Failure to maintain sufficient margin during volatility can lead to automatic liquidation, where the position is closed at a loss to prevent further debt.

Liquidity and Market Dynamics

Perpetual contracts often exhibit higher liquidity than traditional futures, especially on major crypto exchanges. This is due to the 24/7 nature of cryptocurrency markets and the global participation they attract. High liquidity ensures tighter bid-ask spreads and reduces slippage during large trades. Traditional futures, particularly those on regulated commodities or equities, operate within fixed trading hours and may experience lower volume outside peak times. The open interest in perpetuals is a key metric watched by traders, as it reflects the total number of outstanding contracts and can signal market sentiment. Unlike futures, where open interest declines as expiration nears, perpetuals maintain steady or growing open interest over time.

Frequently Asked Questions

What happens if I don’t pay the funding rate on a perpetual contract?

Funding payments are automatically deducted from your margin balance. If your balance is insufficient, your position may be partially or fully liquidated to cover the cost. You cannot opt out of funding payments while holding a position.

Can perpetual contracts be used for hedging like traditional futures?

Yes, they are widely used for hedging. For example, a miner holding BTC can open a short perpetual position to offset potential price declines. The lack of expiry allows long-term hedging without rollover complexity.

Do all perpetual contracts use USDT as the quote currency?

No. While USDT-margined contracts are common, many platforms offer coin-margined perpetuals (e.g., BTC/USD with BTC as collateral) and USDⓈ-margined contracts on Binance. The choice affects profit/loss calculation and risk exposure.

How is the mark price calculated to prevent manipulation?

The mark price is typically a volume-weighted average of the spot price across multiple top-tier exchanges, combined with a fair price mechanism based on the funding rate. This prevents traders from artificially triggering liquidations by spiking the order book.