Perpetual Futures: How Do Perpetual Contracts Work and Why Are They Risky

Do you want to speculate on cryptocurrency movements without purchasing the assets directly and without being tied to fixed expiration dates? Perpetual futures are a financial instrument that allows exactly that. These are cryptocurrency derivatives that give traders the opportunity to open positions with increased risk and potential profit. However, the simplicity of trading can be deceptive — before using such contracts, it’s important to thoroughly understand their mechanics and potential dangers.

What Are Perpetual Futures Really

Perpetual futures are a type of cryptocurrency derivative financial instrument that enable opening both long (betting on price increases) and short (betting on price decreases) positions on any asset. The main difference from regular futures contracts is that they have no expiration date. A trader can hold a position indefinitely as long as they have enough funds to cover potential losses.

Like traditional futures, perpetual contracts offer leverage — the ability to trade amounts exceeding the deposited funds. This can amplify both gains and losses. The key feature of perpetual futures is the absence of a fixed settlement date, giving traders complete freedom in managing their positions.

Why Perpetual Contracts Have Gained Popularity

In recent years, perpetual futures have become one of the most sought-after tools on cryptocurrency markets. There are several compelling reasons:

Unlimited Holding Period. The main advantage of perpetual futures is complete flexibility. Unlike futures with a set expiration date, perpetual contracts exist forever. This means traders can hold their position as long as they see fit, waiting for favorable market movement without the need to constantly rollover contracts.

High Market Liquidity. Perpetual futures markets are characterized by high liquidity. Thousands of participants trade contracts simultaneously, buying and selling. This allows you to quickly enter or exit a position with minimal impact on the market price — so-called slippage.

Multiple Leverage Options. Platforms offer leverage to enhance trading results. High leverage attracts speculators seeking quick profits from short-term price fluctuations. However, the higher the leverage, the greater the risk of losing the entire deposit.

Protection Against Price Drops. While perpetual futures are mainly used for speculation, they also serve as hedging tools. Cryptocurrency owners can open short positions in corresponding contracts to protect against sharp price declines, balancing potential losses.

How Perpetual Futures Differ from Traditional Futures

A common question is: how do these two types of contracts differ? Let’s clarify the key distinctions.

The Lack of Expiration Date as the Main Difference

The most obvious difference is the absence of a fixed term. Futures have a set date when they close and settle. Perpetual futures do not have such a date. They continue to exist as long as the trader has sufficient funds in their account to prevent liquidation — the forced closing of a position due to losses.

This difference fundamentally changes trading approach. With futures, you need to plan ahead, considering the expiration date. With perpetual contracts, you can focus solely on price movement, ignoring the calendar.

Funding Rate: How Price Is Tied to Reality

Another key difference concerns how the contract’s price relates to the actual asset’s price. Futures automatically converge with the spot price as the expiration date approaches. Perpetual contracts lack this mechanism because there is no date.

Instead, a funding fee system is used — payments between traders that keep the contract price close to the real asset price. It works on a simple principle:

If the price of the perpetual contract rises above the spot price of the underlying asset, the funding rate becomes positive. Traders with long positions (betting on growth) pay a fee to traders with short positions (betting on decline). This encourages closing long positions and opening new short positions, which suppresses the contract’s price.

If the contract’s price falls below the spot price, the rate becomes negative. Now, short position holders pay fees to long position holders. This incentivizes traders to switch to long positions, raising the contract’s price.

This dynamic funding rate system maintains the contract’s price in equilibrium with the cryptocurrency’s real market price. Without it, traders would lose motivation to take opposite positions, and the contract’s price would drift away from reality.

Managing Positions: Rollover vs. Eternity

Futures require active management. As the expiration date approaches, traders must close their current position and open a new one with a later expiration date. This process is called rollover or prolongation.

Such actions incur additional costs and risks. Between closing the old position and opening a new one, the price may change — known as slippage. Rollover also involves fees for each new contract.

Perpetual futures avoid this problem. Positions can exist as long as the trader needs, without constant rollovers. This simplifies trading and reduces transaction costs.

Major Risks When Trading Perpetual Contracts

Despite their attractiveness, perpetual futures carry serious risks. Before using these tools, it’s crucial to understand that they can lead to the complete loss of your deposit.

High Leverage Risk. This is the most critical risk. Many platforms offer leverage up to 100x or more, meaning you can trade amounts a hundred times larger than your deposit. An unfavorable price movement of just 1% can wipe out your entire capital. The unpredictability of the crypto market makes high leverage especially dangerous.

Liquidation and Loss Spirals. When losses reach a certain level, the position is automatically closed — liquidation occurs. In volatile markets, this can happen unexpectedly, especially if the market price jumps sharply due to low liquidity at the moment of liquidation.

Funding Fees as Hidden Costs. Holding a position long-term means you constantly pay or receive funding fees. If the rate is high and you hold the wrong position, these payments can eat into your profits significantly.

Crypto Market Volatility. Cryptocurrencies are known for extreme volatility. Sudden price movements of 10-20% within an hour are common. With high leverage, such swings can result in catastrophic losses.

Practical Considerations When Choosing a Platform

If you decide to trade perpetual futures, selecting the right platform is critical. Key parameters to consider:

Liquidity and Trading Volume. The platform should have high daily trading volume for the asset you’re interested in. This ensures you can quickly enter and exit positions without significant slippage.

Leverage Flexibility. A good platform offers leverage options from low (2x-5x) to medium (10x-50x), allowing you to manage risk according to your strategy. The maximum available leverage isn’t the main point; starting small is better.

Margin Requirements System. The platform should clearly display margin requirements at different position sizes. This prevents unexpected liquidations.

Reliable Price Indexes and Protection Mechanisms. A trustworthy platform uses composite index prices instead of a single trade price, helping to prevent manipulation and unjustified liquidations during price spikes.

Real-Time Calculations. Modern platforms offer real-time profit and loss tracking, not daily or delayed calculations. This provides better control over your position.

Transparency in Fees. Make sure you understand all costs involved: opening/closing fees, funding fees, and other charges.

Getting Started: First Steps in Trading

If you’ve decided to try trading perpetual futures, start small:

1. Choose a reputable platform with adequate risk management tools.

2. Begin with low leverage — 2x-5x maximum. This allows you to learn the mechanics without risking your entire deposit.

3. Determine the position size you’re willing to lose. Use stop-loss orders to limit potential losses.

4. Learn the funding fee mechanism for your chosen platform and assets. High rates can eat into your profits.

5. Practice on a demo account or with micro-positions until you gain confidence.

6. Never trade with money you cannot afford to lose.

Conclusion: Perpetual Futures — A Powerful but High-Risk Tool

Perpetual futures indeed provide traders with a tool to speculate on cryptocurrency movements without owning the assets themselves. The flexibility of terms, high liquidity, and leverage options make them attractive.

However, the reality is that perpetual futures are high-risk instruments designed for experienced traders who understand market mechanics and their psychological limits. Beginners are advised to gain experience on spot markets first and understand how crypto trading works in general.

If you choose to trade perpetual contracts, thoroughly study how each platform operates, start with minimal leverage, and remember: the risk of losing your entire deposit is real.