What Are Perpetual Futures? A Beginner's Guide

If you have spent any time around crypto trading, you have almost certainly encountered the term perpetual futures. Often called "perps," perpetual futures crypto contracts are the single most traded instrument in the digital asset market, routinely generating hundreds of billions of dollars in daily volume. Understanding how they work is essential for anyone looking to move beyond simple spot buying and selling. In this guide, we will break down what perpetual futures are, how they differ from traditional futures, and what you need to know before you start trading them.

What Are Perpetual Futures?

A perpetual futures contract is a type of derivative that lets you speculate on the price of an asset, such as Bitcoin or Ethereum, without actually owning the underlying token. Like a traditional futures contract, a perp tracks the price of an asset and allows you to take either a long position (betting the price will rise) or a short position (betting the price will fall).

The key difference is right there in the name: perpetual futures have no expiration date. Traditional futures contracts settle on a specific date in the future, at which point the contract closes and any profit or loss is realized. Perpetual contracts, by contrast, can be held indefinitely. You decide when to open and close your position, giving you far more flexibility in how you manage trades.

This simple innovation, first popularized in the crypto market, is the primary reason perps have become the dominant trading instrument across both centralized and decentralized exchanges.

How Perpetual Futures Differ From Traditional Futures

To appreciate why perps became so popular, it helps to understand the limitations of traditional futures.

Expiration and Rollover

Traditional futures expire on a set date, typically monthly or quarterly, in most markets. When a contract approaches expiration, traders who want to maintain their position must "roll over" into the next contract period. This process introduces additional costs, slippage, and complexity. Perpetual futures eliminate this entirely. There is no expiry, no rollover, and no gap between contract periods.

Price Tracking

Because traditional futures expire in the future, their price can diverge significantly from the spot price of the underlying asset. This difference, called "basis," can work for or against you depending on market conditions. Perpetual futures use a mechanism called the funding rate to keep their price tightly anchored to the spot price, which we will explain in detail below.

Accessibility

Traditional futures are typically offered on regulated exchanges with high capital requirements and complex onboarding. Crypto perpetual futures, especially on decentralized platforms like Hyperliquid, are accessible to anyone with an internet connection and a crypto wallet.

How the Funding Rate Works

The funding rate is the mechanism that keeps the price of a perpetual futures contract in line with the spot market price. It is a periodic payment exchanged directly between long and short traders. The exchange itself does not take a cut.

Here is how it works:

When the perp price is above the spot price, the funding rate is positive. Long traders pay short traders. This incentivizes traders to short the contract (or close longs), pushing the perp price back down toward spot.
When the perp price is below the spot price, the funding rate is negative. Short traders pay long traders. This incentivizes traders to go long (or close shorts), pushing the perp price back up toward spot.

Funding payments are typically settled every eight hours, though the interval varies by exchange. The rate itself fluctuates based on market conditions. During strong bull markets, funding rates can become very high as more traders pile into long positions.

For traders holding positions over longer periods, funding rates are an important cost to monitor. A position that looks profitable on paper can be eroded by accumulated funding payments if you are on the wrong side of the rate for an extended time.

Understanding Leverage in Perpetual Futures

One of the most attractive, and most dangerous, features of perpetual futures is leverage. Leverage allows you to control a position larger than your actual capital by borrowing against your margin (collateral).

For example, with 10x leverage, a deposit of $1,000 lets you open a position worth $10,000. If the price moves 5% in your favor, your profit is $500, a 50% return on your actual capital. However, if the price moves 5% against you, you lose $500, which is half your margin.

How Leverage Magnifies Risk

Higher leverage amplifies both gains and losses proportionally. At 50x leverage, a mere 2% adverse price move wipes out your entire margin. This is why leverage is often described as a double-edged sword.

Most experienced traders recommend starting with low leverage (2x to 5x), especially while you are learning the mechanics. The goal is to survive long enough to develop a consistent strategy, and overleveraging is the fastest way to blow up an account.

What Is Liquidation?

Liquidation is the forced closure of your position by the exchange when your losses approach the amount of margin you have deposited. It exists to ensure that traders cannot lose more than their collateral, which would create bad debt for the system.

How Liquidation Works

Every leveraged position has a liquidation price, a specific price level at which the exchange will automatically close your trade. The higher your leverage, the closer your liquidation price is to your entry price, and the less room the market has to move against you before your position is closed.

Here is a simplified example:

You open a long BTC position at $50,000 with 10x leverage and $1,000 margin.
Your position size is $10,000.
Your approximate liquidation price is around $45,000 (a 10% drop), though the exact level depends on the exchange's fee structure and maintenance margin requirements.

Avoiding Liquidation

There are several ways to manage liquidation risk:

Use lower leverage. This gives your position more room to absorb adverse price movements.
Set stop-loss orders. Exit a losing trade at a predetermined level before liquidation is triggered.
Monitor your margin ratio. Keep an eye on how close your position is to liquidation and add margin if necessary.
Size your positions appropriately. Never risk more on a single trade than you can afford to lose.

Common Use Cases for Perpetual Futures

Perpetual futures are not just for aggressive speculators. They serve several important functions in the broader market.

Speculation

The most obvious use case. Traders use perps to profit from price movements in either direction. Going long when you expect prices to rise, or going short when you expect them to fall, gives you flexibility that spot trading alone cannot offer. You can profit in bear markets just as easily as in bull markets.

Hedging

If you hold a portfolio of crypto assets, you can open a short perpetual futures position to protect against downside risk. For example, if you hold 1 BTC and are worried about a short-term price drop, you can short 1 BTC worth of perps. If the price falls, the loss on your spot holdings is offset by the gain on your short position. This is how many professional traders and funds manage risk.

Earning Funding

Some traders build strategies specifically around capturing funding rate payments. When funding rates are elevated, a trader might go short on perps while holding the equivalent amount of the asset in spot, creating a market-neutral position that earns the funding rate as income. This is known as a cash-and-carry or delta-neutral strategy.

Why Perpetual Futures Dominate Crypto Trading

The numbers speak for themselves. On any given day, perpetual futures volume in crypto markets exceeds spot volume by a wide margin, often by a factor of three to five. Several factors explain this dominance:

Capital efficiency. Leverage lets traders do more with less capital.
Bidirectional trading. The ability to short easily attracts a wider range of strategies.
No expiry management. The simplicity of perpetual contracts makes them more accessible than traditional futures.
Deep liquidity. Because so many participants trade perps, spreads are tight and slippage is minimal on major pairs.

As the crypto market matures, perpetual futures have become the default instrument for serious traders, whether they operate on centralized or decentralized venues.

How to Start Trading Perpetual Futures on Based

If you are ready to put this knowledge into practice, Based provides a powerful trading terminal built on Hyperliquid, one of the fastest and most liquid decentralized perpetual futures exchanges in operation today.

With Based, you get:

Access to deep liquidity on Hyperliquid's order book, with tight spreads across dozens of trading pairs.
A professional-grade trading interface designed for both beginners and experienced traders, with advanced charting, order types, and position management tools.
Self-custody trading. Your funds remain in your own wallet. Based never takes custody of your assets.
Seamless onboarding. Connect your wallet and start trading in minutes. For a step-by-step walkthrough, see our guide on how to start trading on Hyperliquid.

Beyond trading, Based offers Visa debit cards that let you spend your crypto at millions of merchants worldwide, bridging the gap between your trading activity and everyday spending.

Start Trading Perpetual Futures on Based

Perpetual futures are the backbone of crypto derivatives markets, and understanding how they work gives you a significant edge as a trader. Whether you want to speculate on short-term price moves, hedge an existing portfolio, or explore funding rate strategies, perps provide the tools to do so efficiently.

Ready to get started? Start trading perpetual futures on Based and experience decentralized derivatives trading with professional-grade tools, deep liquidity, and full self-custody of your assets.

What Are Perpetual Futures? A Beginner's Guide