In the fast-paced world of cryptocurrency trading, perpetual trading has become a powerful tool for both novices and experienced traders. If you’re new to crypto and asking “What is perpetual trading?” or “How do perpetual futures work?”, you’re in the right place. This article breaks down perpetual trading in plain terms, using real-world examples like ETH/USD to help you understand it. We’ll cover the mechanics, benefits, risks, and steps to get started—anchored in verified sources.
Perpetual trading, sometimes called perpetual futures or “perps,” allows you to speculate on the price movements of assets like Bitcoin (BTC) or Ethereum (ETH) without owning the underlying crypto. Unlike traditional futures, perpetual contracts use leverage to enhance potential gains (and losses). They were first introduced into crypto by BitMEX in 2016. Today, major exchanges such as Binance offer perpetuals widely; others like Coinbase or Kraken provide them only under certain jurisdictions or account types. Perpetual contracts commonly see daily trading volumes in the billions of dollars.
Why Perpetual Trading Matters for Beginners
In volatile markets like crypto, perpetual trading gives you flexibility to profit whether prices go up or down. For example: if you think ETH will fall versus USD, you can short it without actually holding ETH. But it’s not gambling—it’s a derivative contract whose price behavior is carefully managed through mechanisms like funding rates. By the end of this guide, you’ll understand the fundamentals of perpetual trading and whether it’s suitable for you.
What Are Perpetual Futures?
At their essence, perpetual futures are derivative contracts that let you wager on the future price of an asset, but without any expiration date. Traditional futures (in commodities, for instance) require settlement at a predetermined date—if you don’t close your position, the contract is settled or rolled over.
Perpetual contracts invert that: there is no expiration, so you can hold your position indefinitely (assuming you maintain required margin). This design fits crypto’s 24/7 market model, where there’s no closing bell, weekends, or holidays. Think of it as an ongoing bet on a price, but all settled in cash (no physical delivery).
In crypto, perps are typically quoted against stablecoins (e.g. BTC/USDT or ETH/USD). They aim to closely track the spot price, thanks to an internal mechanism that nudges their price alignment. Eliminating expiry removes the “basis risk” you’d see in traditional futures (where futures and spot converge at expiry). This makes perps appealing for both hedging and speculation.
A useful metaphor for beginners: perpetual trading is like renting a car with no due return date—there is a recurring “fee” (funding) to keep it, but you can stop anytime. Because of their simplicity and alignment, perps now command a major share of crypto derivatives liquidity.
How Perpetual Trading Works
Perpetual trading builds on three pillars: margin, leverage, and open positions.
Opening an Account and Depositing Collateral
First, you need to use a crypto exchange that supports perps in your jurisdiction (e.g. Binance is broadly available; Coinbase or Kraken may restrict access depending on location/verification). You deposit collateral (margin), often in USDT or another base asset. This margin is your “skin in the game.”
Leverage
Leverage magnifies your exposure. For example, with 10× leverage, $1,000 of margin controls $10,000 worth of position. If the price moves 5% in your favor, you gain $500 (a 50% return on your margin). But the downside is symmetric—if the price moves against you, you lose fast and can be liquidated quickly.
Long and Short Positions
You can go long (betting the price rises) or short (betting it falls). You enter via market or limit orders. No one transfers actual ETH or BTC—you’re only speculating on price moves.
Funding Rate Mechanism
Because there’s no expiry, there must be a mechanism to tether the perpetual contract price to the spot price. That’s where funding rates come in. Exchanges typically charge or pay funding at fixed intervals (often every 8 hours) depending on whether the perpetual price is above or below spot. If the perp trades at a premium over spot, longs pay shorts; if it trades at a discount, shorts pay longs. This incentivizes traders to push the price back into alignment.
This mechanism is standard on many platforms including Gate.io, as explained in Investopedia’s perpetual futures guide, and Kraken’s documentation.
Exiting and Liquidation
To close out, you reverse your position (i.e. if you were long, sell). Profit (or loss) is computed as (exit price – entry price) × position size, adjusted for leverage, fees, and funding payments. If your margin falls below a maintenance threshold, exchanges will automatically liquidate your position to prevent negative balances. In extreme volatility, some systems use auto-deleveraging (ADL) to close positions even if they’re in your favor.
ADL is more common in high-leverage, high-volatility markets, as documented on Wikipedia and Gate.io’s trading guide.
In real life, perpetual trading is 24/7, with high liquidity especially in major pairs like ETH/USD. Tools like stop-loss, take-profit orders, and position size rules help manage risk—but always begin cautiously as a beginner.
The Role of Funding Rates in Perpetual Futures
Funding rates are the “secret sauce” that keeps perpetual futures anchored to spot prices. Without them, perps could drift far from fundamentals due to market pressure.
Here’s how they work:
At each funding interval (commonly every 8 hours, though this can vary by exchange) a payment is made between longs and shorts, as detailed on Binance’s funding rate explanation, Gate.io’s guide, and Investopedia.
The size and direction of the funding rate depend on the spread between the perpetual contract price and spot, plus an interest component. The exact formula is exchange-specific (there is no universal formula), as noted by Gate.io, Investopedia, and Kraken.
When the funding rate is positive (perp > spot), longs pay shorts. When negative (perp < spot), shorts pay longs. This encourages market participants to take positions that push the price back to equilibrium, as explained on Binance, Kraken, and Investopedia.
On Binance, for example, a fixed interest rate component is built in: 0.03% per day by default, split across the three 8-hour funding intervals (i.e. ~0.01% per interval).
In extreme volatility or extended trends, funding can spike and significantly erode profitability for one side.
For beginners: treat funding as a “rental fee” for holding leveraged exposure. It prevents risk-free holding and encourages traders to adjust in line with market conditions.
Advantages of Perpetual Trading
Perpetual trading offers several advantages—especially in a crypto context:
No expiration date — you can hold as long as you maintain margin.
Leverage — control larger positions with smaller capital.
24/7 access — matches the always-on nature of crypto markets.
Hedging flexibility — e.g. shorting ETH perps even if you hold ETH in spot, as a hedge.
High liquidity — major pairs get tight spreads and fast execution.
Profit in any direction — go long or short easily based on your forecast.
These features make perps extremely popular in crypto.
Risks and Key Considerations
Perpetual trading is not risk-free. Major pitfalls include:
Leverage magnifies losses — a small adverse move can wipe your margin.
Funding rate costs — ongoing payments can eat your gains, particularly in one-sided markets.
Volatility risk — crypto is notoriously volatile, making liquidation frequent.
Liquidation and ADL risk — you can be force-exited, possibly even in a position that would have been profitable under different conditions.
Counterparty and exchange risk — depending on your jurisdiction and platform, you face operational, regulatory, or solvency risks.
Psychological stress — leverage induces emotional swings; manage position sizes, use risk rules, and avoid overtrading.
For beginners, it’s wise to paper-trade or simulate first to internalize mechanics without risking real money.
Example: ETH/USD Perpetual
Let’s do a simple illustration:
Suppose ETH spot is $3,000, and you expect it to rise to $3,200.
With $1,000 margin and 10× leverage, you open a long position worth $10,000 (≈ 3.33 ETH).
If ETH goes to $3,200 (+6.67%), your notional P&L is ~$667 → that’s a 66.7% return on margin (before fees and funding).
If ETH drops to $2,800 (−6.67%), you lose $667 (≈ two-thirds of your margin).
If your margin falls below maintenance threshold, your position is automatically liquidated.
Funding costs apply depending on the 8-hour intervals and the rate at that time (which varies by exchange).
This example shows leverage is a double-edged sword: powerful for gains, devastating for missteps.
How to Get Started with Perpetual Trading
- Choose a reputable exchange (e.g. Binance; ensure perps are available and legal in your jurisdiction).
- Complete verification and deposit collateral.
- Explore the interface (many exchanges offer demo or testnet mode).
- Start small — use low leverage, maybe 1× to 5×, just to get the feel.
- Monitor key indicators — price charts, funding rates, open interest.
- Apply risk rules — e.g. never risk more than 1–2% of margin per trade.
- Regularly review and adapt — as you gain experience, gradually scale strategies, but always stay disciplined.
Conclusion
Perpetual trading demystified: it’s a flexible, leveraged way to trade crypto price movements without expirations, all anchored by funding payments to keep prices in line. For beginners eyeing ETH/USD or similar pairs, it can be exciting—but discipline, strategy, and risk control are nonnegotiable. Always educate yourself, test first, and trade responsibly. In the evolving crypto ecosystem, perps remain a cornerstone of speculation, hedging, and market structure.
Related Resources:
- BitMEX – Pioneer of crypto perpetual futures
- Binance Futures – Leading perpetual contracts exchange
- Coinbase Derivatives – Regulated futures trading
- Kraken Futures – Crypto derivatives platform
- Investopedia: Perpetual Futures – Educational resource
- Gate.io Trading Guide – Comprehensive futures documentation
DYOR: Do Your Own Research
Before diving into perpetual futures, always DYOR — Do Your Own Research.
Perpetual trading combines leverage, derivatives, and round-the-clock markets — powerful tools that demand understanding before use. Every exchange has its own funding rate formula, liquidation rules, and margin requirements. Read their documentation carefully, test strategies on demo accounts, and never rely on advice from influencers or anonymous “trading groups.”
Study basic risk-management principles:
- Limit leverage while learning (1×–3× max).
- Set clear stop-loss and take-profit levels.
- Track funding rates and open interest to avoid crowded trades.
- Keep emotions out — no “revenge trading.”
In crypto, knowledge is your real edge. DYOR isn’t just a slogan — it’s how you stay solvent, disciplined, and in control while others get liquidated.