Perpetual futures, or "perps," are a type of financial contract called a derivative. A derivative is a trading instrument whose value is linked to another asset, such as Bitcoin, Ethereum, or other cryptocurrencies.
Perps allows traders to buy or sell exposure to the price of an asset without ever having to own it directly. Unlike traditional futures contracts, which have a set expiration date, perps can be held for as long as the trader chooses.
This feature makes perps one of the most popular trading instruments in crypto, as they offer exposure to asset price movements while allowing traders to use leverage, hedge risk, and maximize capital efficiency.
How Perps Work
Perpetual futures operate similarly to spot trading but involve contracts that track an asset’s price rather than direct ownership. Traders speculate on price movements without holding the underlying asset.
A funding rate mechanism keeps perpetual prices aligned with the spot market:
When the perpetual price exceeds the spot price, long positions pay short positions.
When the perpetual price is below the spot price, short positions pay long positions.
This mechanism minimizes price discrepancies and ensures perps closely reflect the underlying market.
Key Benefits of Trading Perps
Perpetual futures offer several benefits compared to traditional futures and spot trading:
No Expiry: Unlike traditional futures, perps do not have a set expiration date. Traders can keep their positions open for as long as they choose, as long as they maintain enough collateral to support them.
Leverage: Perps allow traders to increase their position size using borrowed funds. This provides greater exposure to price movements while using less upfront capital.
Hedging: Perps can be used to offset risk. For example, a trader holding spot Bitcoin can open a short position in perps to protect against potential price declines.
Capital Efficiency: Because perps are margin-based, they do not require traders to commit the full value of a position. This makes it possible to use funds more strategically across multiple trades.
How Traders Use Perps
Perpetual futures can serve several purposes for different trading strategies:
Speculation: Traders can establish long positions to benefit from anticipated price increases or short positions to profit from expected price declines, all without requiring ownership of the underlying asset.
Hedging: Perpetual futures enable traders to mitigate downside risk in their portfolios. For instance, an investor holding Bitcoin can open a short perpetual position to offset potential losses in the event of a price decline.
Using Leverage: Perps are margin-based instruments, meaning traders only need to provide a fraction of the position value as collateral.
Example:A trader wants exposure to $50,000 worth of Bitcoin and chooses 10x leverage. They deposit $5,000 as margin to control that position size. If Bitcoin rises 10 percent, they gain $5,000 (100 percent return on margin). If it falls 10 percent, they lose the entire $5,000, and the position may be liquidated.
Why Perps Are Popular in Crypto
Perpetual futures are widely used in crypto markets because they offer continuous trading, high liquidity, and significant market depth. Unlike traditional futures, they have no expiration date, allowing traders to hold positions as long as needed. Combined with leverage and hedging capabilities, perps provide a flexible and efficient way to gain exposure to crypto price movements at any time.
