All You Need to Know About Perpetual Futures
Perpetual futures are here to stay. Once upon a time, they were a fringe trading activity favored by crypto degens; now they’re gradually receiving regulatory approval and are likely to make their way to a regulated exchange near you.
So, on the eve of Coinbase launching its new CFTC-regulated perpetual futures product on BTC and ETH dollar pairs, we thought we’d provide you with a digestible introduction to all things perp. Read on to find out what they are, how they work, where they came from, and why perpetual futures are garnering so much attention in the financial media of late.
What are perpetual futures?
Perpetual futures, perpetual swaps, or “perps” for short, are a financial instrument in which an agreement is made to buy or sell an underlying asset at a future date. Unlike traditional futures that have a specified expiration date for when the exchange must take place, perpetual futures can be held indefinitely.
This means that contracts don’t have to be “rolled” as in regular futures, and possession of the underlying asset never has to take place.
For the price of a perpetual contract to not drift away from the spot value of the underlying asset, payments are exchanged at predefined periods between long and short holders to incentivize other traders to correct the price difference. These payments are referred to as the funding rate mechanism.
How does the funding rate mechanism work in perpetual futures?
In traditional futures, any imbalances between the future price and that of the spot market tend to correct themselves as the contract approaches its expiration date. Seeing as perps don’t expire, a mechanism is required to keep the futures market price in line with the spot price. This is the funding rate mechanism.
When the futures price rises above the spot price (contango), traders who are long pay traders who are short a funding rate. When the futures price falls below the spot price (backwardation), traders who are short pay traders who are long a funding rate.
This incentivizes other traders to take the opposite side of the trade (short when the futures price is higher, long when the futures price is lower), and thus to correct the imbalance between the future and spot market.
The funding rate may vary slightly between venues, but it essentially involves paying the other side the difference between the spot and futures price plus an interest rate. In perpetual futures, these payments occur at set periods throughout the day, depending on the venue, this may be every eight or twelve hours.
What is the history of perpetual futures?
Perpetual futures were proposed by the Economist Robert Shiller in the early 1990s in a paper titled Measuring Asset Values for Cash Settlement in Derivative Markets: Hedonic Repeated Measures Indices and Perpetual Futures. One of the two ideas proposed in the paper involved creating a perpetual claim on the cash flows generated by illiquid or non-standardized assets like real estate.
However, it was in crypto markets that perps would generate the greatest interest. Perpetual futures were first introduced by BitMEX in 2016 on Bitcoin. Initially, these contracts were used as a hedging tool by bitcoin miners. Subsequently, they became even more popular among crypto traders seeking to speculate on underlying crypto assets with leverage.
Perpetual futures have the added benefit of being a highly cost-effective way for markets to be created on less liquid assets without requiring an accumulation of the underlying asset in question. In crypto, this has become a significant use case of perps due to the plethora of new and illiquid coins that are constantly being created.
How do perpetual futures differ from CFDs (contracts for difference)?
Perpetual futures and CFDs are both financial derivatives that allow traders to speculate with leverage on the price of an underlying asset without having to own it or to take possession of it.
Both are cost-effective ways of trading the markets they track because they’re traded on margin, meaning that traders can gain exposure to the underlying by putting up only a fraction of the cost of the position they want to trade.
However, perpetual futures are exchange-traded, unlike CFDs that are traded over the counter. When trading CFDs, brokers either hedge client trades by placing the equivalent positions on the underlying market or they take the opposite side of client trades by internalizing them and thus becoming the counterparty to their clients’ positions.
Also, with perpetual futures, a single contract is traded on exchange by all participants, whereas CFDs are separate contracts traded by each client with their broker.
In perpetual futures, there’s no need to rollover the contract as with CFDs. Instead, they feature a funding rate mechanism in which the difference between the spot and futures price, plus an interest rate, is paid back and forth between longs and shorts at set times when the futures price diverges from the spot price. This is done to incentivize traders to take the other side of the price discrepancy and thus to correct the difference.
In CFD trading, prices don’t diverge from spot values since trading is conducted directly with the broker and the price feed mirrors the spot market. Contracts are made continuous by rolling them over once per day; when this takes place, a swap fee is paid by the trader on the interest of the capital borrowed for the margin position. This fee varies by asset class and can be a positive credit to the trader when the underlying asset is a currency pair in which the currency bought has a higher interest rate than the currency borrowed.
How popular are crypto perpetual futures compared to spot markets?
In less than a decade, perpetual futures have become the darling of crypto markets. Perpetual futures volumes dwarf those generated on spot markets, and the lion’s share of revenues generated by trading venues now comes from futures trading activity rather than from the underlying markets that they track.
According to CoinGecko’s State of Crypto Perpetuals 2024 report, total trading volumes on the top 10 centralized perpetual futures exchanges more than doubled last year, going from $28.8 trillion in 2023 to $58.5 trillion in 2024. Meanwhile, perp trading on decentralized exchanges is also on the rise, with $1.5 trillion in volumes in 2024, a 138% increase on 2023’s total volumes of $647.6 billion.
According to Grayscale data quoted by Unchained, $10.17 trillion in crypto perpetual futures were traded across both centralized and decentralized exchanges in the first six months of 2025. The spot crypto market, by comparison, only traded $3.06 trillion over the same period.
Why are perpetual futures so popular?
Crypto perps have been a resounding success due to a combination of factors. Perps allow traders to speculate on crypto without having to own any, or without having to put any at stake if it is owned. This makes them highly accessible for all types of investors.
Being margin-traded, perps are highly affordable compared to owning the underlying, while allowing for high ratios of leverage to be used for those who want to venture out on the risk curve. This makes them affordable on one hand, while offering the potential for large profits (and losses!) on the other. In this respect, they’re very much like CFDs, and are attracting retail traders in a similar manner to CFDs.
In the US, the over-the-counter nature of CFDs has possibly been their greatest stumbling block in terms of receiving regulatory approval and being legally offered to US traders. The OTC boom in other parts of the world that includes instruments like spread betting and turbos, has largely passed the United States by.
The similarities between perps and CFDs, however, is possibly one of the reasons for the massive amount of interest they have generated in the US, with many expecting an explosion in trading activity as they go live this year and as more venues seek CFTC (Commodity Futures Trading Commission) approval for their perps products.
CFTC approval and Coinbase perps product
Recently, Coinbase, the largest US cryptocurrency exchange, announced the launch of perpetual crypto futures contracts, to begin trading on July 21, 2025. By tweaking the parameters of the product to fit within US regulatory guidelines, the company has succeeded in bringing the enormously lucrative crypto perp market to US traders.
Coinbase perps differ slightly from other perpetual futures in that they expire every five years. This does away with the need to keep rolling positions as in traditional futures markets, allowing for perpetual trading in a way that US regulators approve of. Another difference is that while many perp funding rates are settled every eight hours, Coinbase’s funding rate is settled twice per day, or every twelve hours.
Recognizing the overwhelming popularity of crypto derivatives (it cites reports that estimate derivatives as accounting for up to 90% of crypto trading), Coinbase has sought to bring this activity back to US shores. Previously, US traders were forced to circumvent US regulations by trading perps via offshore venues and decentralized exchanges via VPNs.
Coinbase perps were not the first perps to be approved by the CFTC. In April of 2025, US crypto derivatives exchange, Bitnominal, launched the first US-approved bitcoin perpetual futures. These, however, differ from Coinbase’s product by being bitcoin-settled rather than cash-settled, and are only available to institutional participants at the time of writing.
Conclusion
If the massive success of zero-day-to-expiration options (0DTE) among retail traders is anything to go by, perpetual futures are likely to become a big deal in the US retail trading market.
Traders have voted with their account balances, and the trend is clear. This group favors margin-traded derivatives over spot markets, high leverage ratios, and the ability to jump in and out of contracts without ever having to worry about rolling positions or taking possession of the underlying.
This has been the formula that CFD brokers have used to great success, and it seems the US is about to follow suit with exchange-traded perps. We will keep you updated as the story develops.
If you’re interested in offering perpetual futures to your users, get in touch with us to explore how we can help you launch.