What are perpetual futures? Funding, leverage and liquidation

A perpetual future, or "perp", is a contract that lets you bet on whether an asset's price will rise or fall without owning the asset and without an expiry date. Perps are the workhorse of crypto trading and among the most traded products on large crypto exchanges. This explainer covers how they work, why funding rates matter, how leverage and liquidation work, and the main risks. It is educational and not investment advice.

Futures, but without an end date

A traditional futures contract is an agreement to buy or sell an asset at a set price on a set future date. When that date arrives, the contract expires and is settled. Traders who want to keep a position have to "roll" it into the next contract.

A perpetual future removes the expiry. You can hold a long (betting the price goes up) or a short (betting it goes down) for as long as you keep enough collateral in your account. The idea had been discussed by economists for decades; crypto exchange BitMEX popularised it in 2016 with a bitcoin perpetual swap, and it has since spread to almost every large crypto exchange and to decentralized venues such as Hyperliquid.

You never receive the coin itself. Your profit or loss is the difference between your entry price and the current price, multiplied by the size of your position, and it is paid in the contract's settlement currency, often a stablecoin like USDT or USDC.

How funding keeps the price honest

Without an expiry date, nothing forces a perp's price to meet the real (spot) price at some point. Exchanges solve this with a funding rate, a small payment exchanged between traders at regular intervals, often every eight hours and sometimes hourly.

• If the perp trades above the spot index, the funding rate is positive: longs pay shorts. That makes going long more expensive and pushes the price back down.
• If the perp trades below the spot index, the rate turns negative: shorts pay longs.

The exchange does not keep this money; it moves between traders. For anyone holding a position for days or weeks, funding can add up to a meaningful cost (or income). Persistently high positive funding is often read as a sign that the market is crowded with leveraged longs.

Leverage and margin

Perps are almost always traded on margin. You deposit collateral, the initial margin, and the exchange lets you open a position larger than that deposit. With 10x leverage, $1,000 of margin controls a $10,000 position.

Leverage magnifies both gains and losses. In that 10x example, a 5% move in your favour earns about $500, a 50% return on your margin. A 5% move against you loses the same amount. A move of roughly 10% against you would wipe out the margin entirely, and in practice you are closed out before that.

Most exchanges offer two modes:

• Isolated margin: only the collateral assigned to that position is at risk.
• Cross margin: your whole account balance backs all open positions, so one bad trade can drain funds meant for others.

Liquidation: when the exchange closes you out

Every position also has a maintenance margin, the minimum equity needed to keep it open. If losses push your equity below that level, the exchange's engine liquidates the position automatically, usually at a liquidation price you can see when you open the trade. Exchanges generally use a mark price, based on an index of spot prices, rather than the last traded price, to reduce the risk of being liquidated by a single odd trade.

When many leveraged traders sit on the same side, a price drop can liquidate the first group, whose forced selling pushes the price lower and liquidates the next group. That is a liquidation cascade. It is what happened when $52 million of chip-stock perps were wiped out in ten minutes on a weekend when the stock market was closed.

If a liquidation cannot be filled at a price that covers the loss, exchanges first draw on an insurance fund. In extreme cases some use auto-deleveraging, closing part of profitable traders' positions on the other side.

Perps vs spot vs dated futures

Where perps are allowed

Rules depend heavily on where you live.

• United States: crypto perps were long offered mainly offshore. In May 2026 the CFTC approved the first US bitcoin perp and said it would treat such products as futures case by case. CME Group is fighting that approach in court, arguing that a contract with no end date is a swap; read our report on the CFTC–CME standing fight.
• United Kingdom: the FCA has banned the sale of crypto derivatives, including perps, to retail consumers since January 2021.
• European Union: crypto derivatives fall under existing financial-instrument rules (MiFID II), not under MiCA, so venues need investment-firm licences.

Decentralized perp exchanges run on smart contracts and may be reachable from anywhere, but that does not make them legal everywhere, and they add smart-contract and oracle risk. Our comparison of centralized and decentralized exchanges explains the trade-offs.

The main risks

• Liquidation risk: the higher the leverage, the smaller the move needed to close you out.
• Funding costs: holding a position on the crowded side can become expensive over days or weeks.
• Exchange risk: your collateral sits on the platform. If the exchange fails or freezes withdrawals, your funds are exposed; see how to store crypto safely.
• Weekend and thin-market gaps: perps on stocks or small tokens can move sharply when underlying markets are shut or illiquid.