perpetual contract
What Is a Perpetual Contract (Perpetual Swap)?
A perpetual contract is a type of derivative contract with no expiration date.
As a crypto derivative, its price is kept closely aligned with the spot price through a funding rate mechanism. The funding rate refers to periodic payments exchanged between long and short positions: when the contract price is above spot, longs pay shorts, and vice versa. This helps keep the contract price in line with the underlying asset. Perpetual contracts support both long and short trading with leverage, and can be margined in USDT or the base cryptocurrency. Settlement typically occurs every 8 hours.
Unlike spot trading, perpetual contracts do not require actual ownership of the underlying tokens; positions are opened using margin, and profits and losses result from price movements and funding payments. To manage risk, exchanges calculate a liquidation price based on your account margin and position risk—if this threshold is reached, the position is automatically closed.
Why Should You Understand Perpetual Contracts?
Perpetual contracts are the most widely used derivatives in crypto trading.
They allow for two-way trading—going long in bullish markets and short in bearish conditions—giving investors strategies for any market trend. For asset holders, perpetual contracts enable hedging against volatility; for example, a BTC holder can open a short perpetual position to offset downside risk and reduce drawdown on net asset value.
Perpetuals also offer entry points for funding rate and basis trading strategies. Funding rates are generally small but stable, making them useful for balancing portfolio fluctuations under low leverage. Understanding how perpetual contracts work and their risks is essential for anyone entering the crypto derivatives market.
How Do Perpetual Contracts Work?
The core mechanisms are the funding rate and mark price working together to maintain price alignment.
The mark price is a reference value used by exchanges to calculate margin requirements and liquidation thresholds. It typically combines index prices and recent trade prices to avoid manipulation from outlier trades on a single market. When the contract price diverges from the mark price, the funding rate incentivizes prices to revert: longs pay when prices are high, shorts pay when prices are low. Most platforms (e.g., Gate) settle funding every 8 hours, with rates determined by the degree of divergence, prevailing interest rates, and position structure.
Example: If a BTC perpetual contract has a funding rate of +0.01% at settlement, longs pay shorts 0.01% of their notional value. If you hold a 1 BTC long position, you'll pay approximately 0.01% in fees at settlement; if the rate is negative, you receive payment instead.
Leverage and margin determine your exposure to amplified gains or losses. Isolated margin confines margin and risk to a single position, while cross margin pools account balances to cover all positions’ risk. Liquidation acts as an automatic stop-loss—when your maintenance margin is insufficient, your position will be force-closed. Setting appropriate leverage and stop-loss levels can help control both funding costs and price volatility.
Common Use Cases of Perpetual Contracts in Crypto
Perpetuals are primarily used for leveraged trading, risk hedging, and strategy arbitrage.
On exchanges offering leveraged trading, traders often use USDT-margined perpetuals to amplify their positions. For instance, on Gate’s BTC/USDT perpetual market, you might go long if bullish or short if bearish in the short term, managing risk through stop-loss and take-profit orders.
For hedging, miners or long-term holders use short perpetuals to offset downside risk in spot holdings—for example, holding 10 BTC spot while opening an equivalent BTC perpetual short on Gate. The main cost here is the funding rate, but it significantly reduces net exposure to market swings.
In arbitrage, popular strategies include “spot + perpetual” basis trades or funding rate capture: when funding is positive and stable, holding spot while shorting perpetuals earns the rate; if negative, holding spot and going long perpetuals can be profitable. However, funding rates fluctuate with market conditions and can reverse quickly in volatile periods—thus strict control of leverage and position size is vital.
How to Trade Perpetual Contracts
Complete account setup and risk controls before opening positions.
Step 1: Register with Gate, complete KYC verification, enable contract trading permissions, and familiarize yourself with contract rules and funding rate policies.
Step 2: Choose your contract type. USDT-margined contracts are more straightforward (P&L settled in USDT); coin-margined contracts use the underlying crypto for margin and settlement—better suited for heavy holders of a single coin.
Step 3: Select between isolated or cross margin, and set your leverage. Beginners should start with isolated margin and low leverage (e.g., 1-3x) to contain risk within individual positions.
Step 4: Place an order to open a position. Use limit orders for precise entry or market orders for instant execution; always set stop-loss/take-profit levels and check estimated liquidation prices to avoid emotional decisions.
Step 5: Monitor funding rates and settlement times. Funding can fluctuate around settlement; if holding positions long-term, factor these costs into your strategy.
Step 6: Manage positions dynamically. Adjust margin, move stop-losses, or partially close positions based on price action and account risk to avoid approaching liquidation thresholds.
Step 7: Close positions and review your performance. After closing, analyze whether profits/losses came from price movement or funding rates to optimize your next strategy.
Recent Trends and Data in Perpetual Contracts
Perpetuals dominate trading volumes with more stable funding rates.
In 2024, perpetual contracts consistently accounted for 70%-80% of crypto derivatives trading volume (with minor variations across data sources). This shows perpetuals remain the primary venue for liquidity and depth on major exchanges and top pairs.
As of Q3 2024, total open interest (OI) for Bitcoin perpetuals across all platforms ranged from $20–30 billion, with higher volatility periods seeing elevated OI levels—indicating more consistent participation from institutions and market makers. Over the past six months, major coins like BTC and ETH have seen funding rates mostly stay within ±0.01% to ±0.05%, widening only during extreme market moves; sharp reversals in funding direction often coincide with rapid price swings.
Structurally, USDT-margined perpetuals continue to gain share as traders prefer stablecoin-denominated risk management and settlement. Growth in market-making and quantitative strategies has led to faster price corrections and generally milder funding rates—but during unexpected events or high-leverage clusters, funding spikes and liquidation cascades can still drive significant volatility.
How Are Perpetual Contracts Different from Delivery (Futures) Contracts?
Perpetuals have no expiry; delivery futures settle on a set date.
Perpetual contracts never expire—they use the funding rate mechanism to stay anchored to spot prices. Delivery (or standard futures) contracts have fixed expiration dates; upon maturity they settle at an index price or via physical delivery. The relationship between contract price and spot manifests in term structure and basis premium rather than funding payments. Perpetuals suit short-term leveraged trading and rolling hedges; delivery futures are better for capturing term spreads or targeting specific expiry dates.
Cost- and risk-wise, perpetuals’ main long-term holding cost comes from funding fees, whereas delivery futures costs stem from rollovers and basis changes. For long-term hedging, perpetual users must monitor funding direction and manage leverage carefully; if you're seeking to capitalize on specific expiry-date spreads, delivery contracts—with attention to roll timing—are preferable.
Key Terms
- Perpetual Contract: A derivative contract with no expiry date that allows traders to go long or short crypto assets with leverage.
- Funding Rate: Periodic payments exchanged between longs and shorts in perpetual contracts to keep contract prices anchored to spot.
- Leverage Trading: Using borrowed funds to amplify gains or losses—a common practice in derivatives markets.
- Liquidation: The automatic closure of positions by the exchange when account equity falls below required maintenance margin.
- Mark Price: A reference price for perpetual contracts derived from spot prices plus basis premium; used to prevent price manipulation.
- Delivery (Futures) Contract: A futures contract that expires on a set date with cash or physical settlement—unlike perpetuals.
FAQ
What Is the Funding Rate in Perpetual Contracts and Why Does It Matter?
The funding rate is a periodic payment exchanged between longs and shorts to keep contract prices aligned with spot markets. When there are more longs than shorts (contract trading above spot), longs pay shorts; when shorts dominate (contract below spot), shorts pay longs. This directly affects your holding costs—on Gate or any platform, monitor funding direction to avoid excessive costs during volatile markets.
What Does Liquidation Mean in Perpetual Contracts, and How Can I Avoid It?
Liquidation occurs when your margin balance falls below what's needed to maintain open positions—triggering forced closure. Large adverse price swings relative to your leverage/margin ratio cause this. To avoid liquidation: use reasonable leverage (2–5x for beginners), set stop-losses, keep sufficient margin balances, and never commit all funds to one trade.
After Opening a Perpetual Contract on Gate, When Should I Close My Position?
The best time to close depends on your strategy—consider these factors: reaching your target price level; technical indicators signaling trend reversal; risk/reward ratio deteriorating (e.g., gains increase less than potential losses). Use take-profit orders for automatic execution; securing gains in volatile markets is often wiser than aiming for perfect tops or bottoms.
What Are Common Mistakes Beginners Make with Perpetual Contracts?
Typical pitfalls include: excessive leverage (leading to instant liquidation on small moves), all-in trades (no room for error), chasing trends (buying tops/selling bottoms), ignoring funding fees (incurring repeated costs on long holds). Beginners should start with low leverage (2–3x), small trade sizes, practice technical analysis, use demo accounts like those on Gate, build risk awareness first before scaling up.
What’s the Difference Between Mark Price and Trade Price in Perpetual Contracts?
Trade price is what you actually buy or sell at; mark price is an exchange-calculated reference (usually averaging multiple sources) used for margin calculation and liquidation triggers. When there’s a gap between them, mark price takes priority for liquidation—protecting traders from unfair liquidations due to isolated price spikes.
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