Perpetual Futures: A Complete Guide for Traders

What Are Perpetual Futures? 

Before we move on to the peculiarities of perpetual trading, let’s find out what crypto derivatives are. They are derivatives whose price is tied to an underlying token or coin. 

Futures are considered the most common derivatives. These are contracts concluded between two parties that commit to buy or sell a digital asset in the future, with the transaction date and rate determined in advance. Such transactions give you the opportunity to make money on changes in the value of tokens and coins that you don’t actually own. 

Perpetual futures are a special type of contract that allows holding a position for as long as the trader wishes, provided there are enough funds in their account to cover potential losses (margin). 

Using perpetual contracts, you can open long (for a rising rate) and short (for a falling price) positions, apply leverage, and profit even in a falling market. The price of contracts is formed only by the supply and demand of traders. So that it does not deviate too much from the real value of the asset on the spot market, trading platforms use the mechanism of “funding rate.” If a perpetual futures trades above the cryptocurrency’s spot rate, traders with long positions pay a commission to their short opponents, and vice versa. In this way, the exchange switches the cash flow between the bidders, equalizing the prices. 

Why Are They Popular in the Cryptocurrency Market? 

Perpetual futures are among the most sought-after instruments in crypto trading for the following reasons: 

• The absence of an execution date for the contract. This allows you to hold positions without worrying about the deadline for closing the deal. 

• Trader activity. High liquidity simplifies the opening and closing of positions without significant price spikes. 

• Possibility to trade with borrowed funds. Leverage attracts traders who want to increase their potential profit. For example, with 10x leverage, you can manage a $20,000 position with only $2,000. However, remember that this tool also increases risks. 

• Loss Compensation. Perpetual trading allows hedging, which is useful for speculation and asset protection. For example, a cryptocurrency owner can open a short position in perpetual futures to compensate for possible losses when the rate falls on the spot. 

How Do Perpetual Futures Work? 

Let’s consider the peculiarities of perpetual trading with examples: 

Earnings on price growth 

Let’s say a trader expects the Bitcoin exchange rate to rise from $90,000 to $95,000 and opens a long position in the perpetual futures for 1 BTC using 10x leverage. To do this, they need to deposit $9,000 in margin (collateral), and the exchange will provide the remaining funds. 

If the predictions are correct, the trader will close the position and receive a $5,000 profit ($95,000 – $90,000). 

However, if the price falls, for example, to $89,000, the trader will incur a loss of $1,000. If the price continues to fall and the trader’s account balance falls below the minimum acceptable level, the exchange will liquidate the position, closing it automatically so that the trader does not lose money. 

Earnings on price decline 

Let’s imagine that a trader bets on Bitcoin’s decline from $90,000 to $85,000. In this case, they open a short position in a perpetual 1 BTC futures using 10x leverage and deposit $9,000 in margin: 

• If the price does fall to $85,000, the trader closes the position and earns $5,000 ($90,000 – $85,000). 

• If the cryptocurrency starts to rise and goes up to $91,000, for example, the trader will lose $1,000. 

• If the rate reaches the liquidation level (e.g., $92,000, depending on exchange conditions), the position will be automatically closed. 

Funding fee 

It is a fee that helps keep the price of the perpetual futures close to the real price of the asset. Exchanges do not set the fee — it is automatically formed depending on the supply and demand in the market: 

• If more people buy than sell, the amount of the fee will be positive. In this case, traders with long positions pay to traders with short positions. 

• If sell trades predominate, the fee will be negative, and participants with short positions will pay their opponents with long positions. 

If you have a position open on perpetual futures, the commission may be deducted from your balance or, on the contrary, charged every 8 hours (on most exchanges). If you hold a position for a long time, the funding fee can eat up a significant part of your profit. Experienced traders sometimes capitalize on this mechanism by opening positions in favor of the commission. 

Example: 

Let’s assume that most exchange users are confident that the Bitcoin price will rise, so the market is overflowing with longs. The platform sets the funding fee at 0.01% every 8 hours. If you are in a long position, the exchange will deduct 0.01% of your position, and if you are in a short position, it will charge you.  

Advantages and Risks of Trading Perpetual Futures 

Trading contracts without an expiration date comes with advantages and disadvantages. We have prepared a detailed analysis: 

Advantages  

We have already found out that the main reasons for the popularity of perpetual futures are flexibility, hedging, leverage, and high liquidity. These are the main benefits of this trading instrument. However, other factors also attract traders, such as: 

• 24/7 availability. You can trade at any time without restrictions. 

• High volatility. For experienced traders, sharp price fluctuations open up opportunities for quick speculative profits. 

• Variety of trading strategies. Perpetual futures are suitable for short-term trading and more complex strategies, such as arbitrage, scalping, and medium-term investing. 

• No need to own the asset. Unlike with spot trading, a trader does not need to buy crypto and worry about the safety of storing it. 

Risks 

The disadvantages of perpetual contracts include the following: 

• High leverage. Trading with exchange funds increases the risk of financial losses and rapid liquidation of positions. 

• Funding fee. Commission payments can significantly reduce the final profit. 

• Settlement complexity. Perpetual contracts have dynamic pricing that depends on funding and market conditions. This makes them more complicated to understand, especially for beginners. 

Perpetual Futures vs. Standard Futures 

Although both types of contracts are considered derivatives, perpetual futures and standard futures have major differences: 

Expiration date 

Standard futures have a fixed expiration date, when the contract automatically closes and the trader receives a settlement depending on the cryptocurrency’s exchange rate. 

Perpetual futures can be held indefinitely if the trader has enough margin, which is convenient for long-term trading. 

Funding fee mechanism 

Standard futures gradually move towards the spot price since their value automatically adjusts as the expiration date approaches. 

Perpetual futures use the funding fee mechanism to keep the contract value close to the market price of the asset. 

Position management 

In standard futures, traders have to switch contracts (close an old contract and open a new one with a later expiration date) if they want to continue trading. This can lead to additional costs and slippage — the difference between the expected and actual price of a trade. 

Perpetual contracts do not require replacement and can exist as long as the trader has enough margin. 

Basic Strategies for Trading Perpetual Futures 

Tactics for trading should be chosen based on your goals and experience. Let’s consider three key strategies: 

Speculation 

This is a way to capitalize on short-term rate fluctuations. Traders use technical analysis, charts, and indicators to predict prices. 

Long-term investing 

This strategy is based on fundamental analysis that considers macroeconomic factors, geopolitics, and demand for the asset. Investors open positions for the long term, counting on a global rise or fall in price. 

Hedging 

This tactic is used to insure against losses caused by changes in the underlying asset’s price. The strategy is especially relevant for businesses and large investors. 

Tips for Beginner Traders 

If you are just starting your way in trading perpetual crypto derivatives, the following recommendations will help you get used to it faster and start earning: 

1. Learn the basics. Understand what a funding rate, leverage, long/short positions, and the differences between standard and perpetual futures are; also master technical and fundamental analysis. 
2. Start small. Use leverage 5x-10x, avoiding the maximum (100x), risk no more than 1%-5% of capital per trade, put stop-losses and take-profits. Practice on a demo account before trading with real money. 
3. Watch out for commissions. A high funding rate can “eat” profits, so you should check it before opening a position. Take into account commissions for opening/closing trades and withdrawals. 
4. Avoid excessive diversification. Focus on 2-3 assets that you have studied well. Trading a large number of tokens and coins makes it difficult to analyze. 
5. Study margin requirements. Maintain sufficient account balance to avoid forced liquidation of positions. Use the liquidation calculators available on many exchanges. 
6. Control emotions. Do not give in to FOMO (fear of missing out on profits) and panic. Make a trading plan and follow it. 
7. Analyze your mistakes. Keep a trading diary: write down the reasons for entry/exit, emotions, and results. Analyze losing trades to avoid repeating mistakes. 
8. Do not trust “guaranteed” strategies. Avoid signals from Telegram channels or “gurus” promising 100% profit. Check the information yourself and think critically. 

Conclusion 

Perpetual futures help you make money on the volatility of cryptocurrencies. They have no expiration date and allow you to use leverage and hedge risks. However, this instrument requires a deep understanding of funding rates and a competent approach to capital and emotion management. Remember that high profit is associated with increased risks, and success in trading depends on market analysis, discipline, and constant learning. 

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