Perpetual Futures

A perpetual future is essentially a synthetic position: it mimics owning the underlying asset on margin, forever, without ever having to roll the contract into a new expiry. Traders open a position with a fraction of its notional value posted as collateral, then use leverage to amplify exposure in either direction, long or short.

The mechanism that makes this work is the funding rate. Every few hours (commonly every eight hours, though some venues settle hourly), longs and shorts exchange a small payment directly with each other, the exchange itself keeps none of it. If the perpetual's price trades above the spot index, funding turns positive and longs pay shorts, discouraging further long buildup. If it trades below spot, shorts pay longs instead. This constant tug-of-war keeps the contract price tethered to spot even though there is no expiry date to force convergence.

The product was invented by BitMEX, launching its XBTUSD perpetual swap in May 2016 as a fix for retail traders confused by expiring futures. Every major exchange has since copied the design, and perpetuals now account for the large majority of all crypto derivatives volume, dwarfing spot trading on many platforms.

Because positions never expire, traders can also treat funding as a standalone yield source, for example via cash-and-carry trades that pair a spot purchase with a short perpetual. The main risks are liquidation from leverage and sudden funding-rate reversals during volatile markets.