Crypto perpetual contracts are an innovative financial instrument that allows traders to speculate on the price movement of a digital asset without owning the asset itself and without restrictions on the duration of the position. They have gained immense popularity due to their flexibility, accessibility, and wide range of opportunities for implementing various trading strategies.

We explain what perps trading is, how it works, what its advantages and disadvantages are, and how to use it to maximise profits.

What are perpetual futures?

Perpetual futures are a special type of financial instrument that are derivative contracts whose value is tied to the price of a specific cryptocurrency asset. Crypto perpetual contracts give traders the opportunity to speculate on changes in the value of digital assets without directly purchasing the assets themselves.

The main advantage of these assets is that they are perpetual. Whereas traditional futures contracts have a clear expiry date, perpetual contracts are not limited by time frames. This frees traders from the need to periodically renew contracts and extend their positions manually.

Next, we will discuss the main elements of perpetual futures.

Contract value

The price of a perpetual futures contract is closely linked to the price of the corresponding spot asset (e.g., Bitcoin or Ethereum). Special mechanisms ensure that the contract price always corresponds to current market conditions.

Trading with leverage

Perps trading platforms often allow users to apply significant leverage - from 2x to 125x. This allows traders to manage large positions by investing relatively small amounts of their own funds. It is important to remember that high leverage carries an increased risk of significant losses.

Leverage allows you to increase the efficiency of your capital investment by managing large volumes of assets with a small amount of your own capital. However, a high proportion of borrowed funds increases the risks many times over.

Settlement process and financing mechanism

Instead of the traditional settlement process at the end of the contract term, perpetual futures provide for periodic financing rate payments. This procedure is carried out regularly and is aimed at maintaining a balance between spot and futures market prices.

The funding rate is calculated based on the difference between the value of the perpetual contract and the spot price of the underlying asset. It can be charged to long position holders in favour of short position holders (with a positive rate) or vice versa (with a negative rate).

Perpetual futures are a powerful tool for experienced traders seeking to effectively manage risk and benefit from the dynamics of cryptocurrency markets.

How perpetual futures work

The principle of perpetual futures is based on a combination of market factors and specific mechanisms that ensure that the contract price accurately follows changes in the spot market. Let's take a step-by-step look at how perpetual swaps work.

Types of positions

There are two basic strategies for opening positions:

• Long. Buying a contract with the expectation that the asset price will rise. Profit is generated when the value of the cryptocurrency increases.

• Short. Selling a contract with the aim of profiting from a price decline. Profit is generated when the asset price falls.

To start trading, a trader must deposit a certain amount of collateral, known as margin. The size of the initial margin depends on the level of leverage chosen by the market participant. The higher the leverage, the less start-up capital is required, but the level of risk increases proportionally.

Margin requirements

There are two types of margin requirements:

• Initial margin - the minimum amount required to open a position.

• Maintenance margin - the threshold value of the account balance below which automatic liquidation of the position is initiated.

If the funds in the account fall below the maintenance level, the exchange forcibly closes the position to prevent further losses.

Price formation system

Perps platforms use a special market price assessment system that differs from simply fixing the last completed transaction. A weighted average indicator is used, which includes quotes from leading spot platforms. This reduces the impact of sharp fluctuations and prevents unjustified liquidation of positions.

The financing rate mechanism and its significance

The central element of the perpetual futures system is the financing rate mechanism. Its main purpose is to ensure that the price of a futures contract matches the spot market level as closely as possible, despite the absence of a set contract expiry date.

How the funding rate works

Funding payments are made periodically, usually every 8 hours. The amount of the payment depends on the current ratio between the perpetual contract price and the spot price of the underlying asset:

• Positive rate. When the contract price exceeds the spot price, buyers (long positions) pay sellers (short positions). This motivates an increase in the number of sellers and a return of the price closer to the spot level.
• Negative rate. If the contract price is lower than the spot price, the payment goes in the opposite direction - from sellers to buyers. This encourages new buyers to enter the market and pushes the price up.

Formally, the financing rate includes two components: Financing rate = (interest component) + (premium/discount), where:

• The interest component reflects the average interbank borrowing rate.
• The premium/discount shows the degree of deviation of the contract price from the spot value.

These values are published openly by most exchanges and serve as a guide for traders' decisions.

Comparison of perpetual and traditional futures

It is important to understand the fundamental differences between the two types of contracts in order to make an informed choice of the right instrument for your purposes.

The choice of instrument depends on your trading strategy and willingness to take on additional risks. Perpetual futures are ideal for active traders who prefer flexibility and high manoeuvrability. However, remember the importance of competent risk management and careful analysis of the market situation.

Advantages of perpetual futures

Key advantages

• Flexibility. They allow you to hold positions for an indefinite period of time.
• High liquidity. Round-the-clock trading facilitates a quick response to events.
• Wide range of credit leverage. The ability to open large positions with minimal capital expenditure.
• Ease of use. Easier for beginners to learn compared to traditional financial instruments.

Disadvantages of perpetual futures

Main disadvantages:

• High risks. Excessive use of leverage can lead to rapid and complete capital losses.
• Financing costs. Holding positions for a long time involves regular payments or receipts that affect the final return.
• Need for active monitoring. You need to constantly monitor the market and your own position to prevent liquidation.
• Possibility of manipulation. Theoretical risk of large players influencing the formation of the financing rate.

Application of perpetual futures

Perpetual futures are used in various areas of trading and investment activities:

• Speculation. Traders can earn both on the rise and fall of the asset price by opening long or short positions, respectively.
• Hedging. Investors use short positions on perpetual futures to insure their long-term investments against temporary price declines.
• Arbitrage. Differences between the financing rate and the spot price create opportunities for arbitrage, allowing profits to be made without the direct risk of changes in the price of the asset itself.
• Portfolio management. Professional investors use perpetual futures to diversify and optimise the structure of their portfolios.

Let's look at two real-life examples of perpetual futures trading.

Example #1. Long-term speculation on the growth of Bitcoin

Suppose an investor believes in the future growth of Bitcoin and decides to purchase a perpetual futures contract with 10× leverage. With a deposit of $1,000, he controls a position of $10,000. If the price of Bitcoin rises by 10%, their profit will be $1,000 ($10,000 × 10%), doubling the initial amount. But if the price falls by 10%, they lose their entire investment.

Example 2. Hedging an existing portfolio

An investor owns a large amount of ether and fears a possible short-term price drop. He opens a short position on a perpetual ether contract. If the price falls, the profit from the short position will offset the decline in the value of the main portfolio, protecting the capital from unwanted losses.

Perpetual futures on the Aster and Hyperliquid exchanges

Perpetual futures are one of the most popular instruments on the crypto market. Today, they are actively traded on two promising platforms: Aster and Hyperliquid.

Aster

Aster is a decentralized exchange in the BNB Chain ecosystem specializing in perpetual futures. Key features:

• Low commissions. The platform offers attractive rates for traders.
• Integration with BNB Chain. Fast transaction processing and low network costs.
• Simple interface. Designed for users of all skill levels.
• Liquidity. The exchange is actively developing liquidity pools for major trading pairs.

Hyperliquid

Hyperliquid is a decentralized trading platform focused on perpetual futures and high performance. Its distinctive features are:

• High-speed engine. Ensures instant order execution even under high load.
• Deep liquidity. The platform attracts large market makers, which reduces slippage.
• Advanced tools. Complex order types and analytical widgets are available.
• Decentralization. Users retain full control over their assets.

Comparison of Aster and Hyperliquid

Aster is the optimal choice for those who prioritize cost-effectiveness and convenience. Hyperliquid is the preferred option for experienced traders who value performance and market depth.

Conclusion

Perpetual futures have become an integral part of the modern cryptocurrency market thanks to their unique characteristics and capabilities. Their appeal lies in their combination of flexibility, high liquidity, and variety of applicable strategies.

At the same time, successful trading requires in-depth knowledge, a disciplined approach and effective risk management. Competent use of perpetual futures can generate significant income, but ignoring potential threats can lead to serious financial losses.

Before you start trading, it is recommended that you carefully study the principles of perpetual futures, familiarise yourself with the features of your chosen trading terminal, and develop a clear risk management strategy.

Frequently asked questions

What are perpetual futures?

Perpetual futures are derivative contracts that allow traders to speculate on changes in the price of cryptocurrencies without owning the asset itself and without a set expiry date for the contract.

Why are perpetual futures called ‘perpetual’?

Because they do not have a set expiry date, unlike traditional futures. A position can be held for as long as the trader wants, until they close it themselves or it is automatically liquidated.

How does the funding rate mechanism work?

The funding rate mechanism regulates the relationship between the price of a perpetual contract and the spot price of the underlying asset. Every 8 hours, mutual settlements take place between long and short position holders, encouraging price convergence.

Why use leverage in perpetual futures?

Leverage allows traders to increase the size of their position beyond their initial capital, potentially multiplying their profits. However, it also amplifies potential losses, so it must be used with caution.

What is margin and why is it needed?

Margin is a deposit made by a trader to open a position. There is an initial margin (required to open a position) and a maintenance margin (the minimum level required to maintain a position). If the funds in the account fall below the maintenance margin, the position will be liquidated.

How do perpetual futures differ from traditional ones?

The main difference is the absence of a contract expiry date. Instead of a one-time settlement, regular financing payments are used, and price convergence is achieved through a financing mechanism rather than naturally at expiry.