Crypto Futures Trading: How Perpetual Futures Work

Crypto futures are contracts that let you profit from a price rising (going long) or falling (going short) without owning the coin, usually with leverage. The most traded type is the perpetual future, which never expires and is kept close to the spot price by a regular funding payment between longs and shorts. Because leverage multiplies both gains and losses on your margin, futures demand stricter risk rules than spot trading.

Spot vs futures in one table

	Spot	Perpetual futures
You own	The coin	A contract on its price
Profit when price falls	No	Yes, with a short
Leverage	No	Yes
Can be liquidated	No	Yes
Ongoing costs	None (beyond fees)	Funding payments, every few hours
Expiry	None	None for perpetuals; dated futures expire

Perpetual vs dated futures

Traditional futures have an expiry date: on that day the contract settles and its price must equal the spot price. Before expiry, the futures price can trade above or below spot; the gap is called the basis.

The crypto exchange BitMEX introduced the perpetual swap in 2016. It has no expiry. Instead, every few hours (commonly every 8 hours, though some contracts use 1 or 4 hours) traders pay each other a funding rate. When the perpetual trades above spot, longs pay shorts, which encourages shorting and pulls the price back down, and vice versa. The next lesson, Funding Rates and Open Interest, covers this in detail.

Linear and inverse contracts

• Linear (USDT-margined or USDC-margined): margin and profit are in a stablecoin. A long of 0.1 BTC gains $100 for every $1,000 BTC rises. Simple to calculate; the usual choice for beginners.
• Inverse (coin-margined): margin and profit are in the coin itself, for example BTC. If you are long an inverse BTC contract and BTC falls, you lose on the position and your BTC collateral is worth fewer dollars, which doubles the pain.

Margin and leverage

Leverage lets you control a position larger than your deposit. The deposit you post is the initial margin:

Initial margin = Position value / Leverage

There is also a maintenance margin: the minimum equity the exchange requires to keep the position open. If losses push your equity below it, the position is liquidated. The math is in Liquidation Price.

Going short

A short profits when the price falls.

Isolated vs cross margin

• Isolated margin: each position has its own margin. If it is liquidated, you lose that margin and nothing else.
• Cross margin: all positions share your whole futures balance. A losing position can draw on all of it to avoid liquidation, which delays liquidation but can drain the entire account in one bad move.

Beginners should use isolated margin, one position at a time, and keep only the money needed for active trades in the futures wallet.

Mark price vs last price

Exchanges use a mark price, a fair price based on an index of spot prices from several exchanges, to calculate unrealised profit and liquidations. This stops a brief spike on one exchange from liquidating everyone. Your stop-loss can usually be set to trigger on either mark or last price; check which one you are using.

What futures are good for

1. Shorting: profiting from or protecting against falling prices.
2. Hedging: reducing the risk of coins you hold without selling them.
3. Capital efficiency: posting less margin for the same exposure, so the rest of your money can stay in safer storage, as long as position size is still set by the stop, not by the leverage slider.

Example (hedge): You hold 1 BTC on spot and are worried about the next week, but do not want to sell. You open a short of 0.5 BTC on a perpetual. If BTC falls $4,000, your spot loses $4,000 and the short gains about $2,000, so your net loss is about $2,000 plus costs. If BTC rises, you give up half the gain. A hedge is insurance with a price: fees, possible funding payments and margin you must keep available.

The real costs of futures

• Trading fees on the full position value, both opening and closing.
• Funding on the full position value, every funding interval, for as long as you hold.
• Slippage, especially on stops in fast markets and on thin altcoin contracts.
• Liquidation fees, if the exchange has to close you out.

Fees and funding are charged on the position value, not on your margin. With high leverage, they eat a large share of your margin, as Why Most Leveraged Traders Lose shows with numbers.

Next: the payment that keeps perpetuals tied to spot, in Funding Rates and Open Interest.