{"id":8554,"date":"2025-07-22T07:44:45","date_gmt":"2025-07-22T07:44:45","guid":{"rendered":"https:\/\/devexperts.com\/blog\/?p=8554"},"modified":"2025-07-29T12:49:47","modified_gmt":"2025-07-29T12:49:47","slug":"all-you-need-to-know-about-perpetual-futures","status":"publish","type":"post","link":"https:\/\/devexperts.com\/blog\/all-you-need-to-know-about-perpetual-futures\/","title":{"rendered":"All You Need to Know About Perpetual Futures"},"content":{"rendered":"\n
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Perpetual futures are here to stay. Once upon a time, they were a fringe trading activity favored by crypto degens; now they\u2019re gradually receiving regulatory approval and are likely to make their way to a regulated exchange near you. <\/p>\n\n\n\n

So, on the eve of Coinbase launching its new CFTC-regulated perpetual futures product on BTC and ETH dollar pairs, we thought we\u2019d 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. <\/p>\n\n\n\n

What are perpetual futures? <\/h2>\n\n\n\n

Perpetual futures, perpetual swaps, or \u201cperps\u201d 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. <\/p>\n\n\n\n

This means that contracts don\u2019t have to be \u201crolled\u201d as in regular futures, and possession of the underlying asset never has to take place.<\/p>\n\n\n\n

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.  <\/p>\n\n\n\n

How does the funding rate mechanism work in perpetual futures? <\/h2>\n\n\n\n

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\u2019t expire, a mechanism is required to keep the futures market price in line with the spot price. This is the funding rate mechanism. <\/p>\n\n\n\n

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.  <\/p>\n\n\n\n

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.  <\/p>\n\n\n\n

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.  <\/p>\n\n\n\n

What is the history of perpetual futures? <\/h2>\n\n\n\n

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<\/a>. 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. <\/p>\n\n\n\n

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.  <\/p>\n\n\n\n

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.  <\/p>\n\n\n\n

How do perpetual futures differ from CFDs (contracts for difference)? <\/h2>\n\n\n\n

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.  <\/p>\n\n\n\n

Both are cost-effective ways of trading the markets they track because they\u2019re 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.  <\/p>\n\n\n\n

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\u2019 positions.  <\/p>\n\n\n\n

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. <\/p>\n\n\n\n

In perpetual futures, there\u2019s 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.  <\/p>\n\n\n\n

In CFD trading, prices don\u2019t 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.    <\/p>\n\n\n\n