What Is Perpetual Contract?
Also known as: Perpetual Futures, Perpetual Swap, Perp, Perps
In short
A perpetual contract is a futures contract with no expiry date whose price is kept close to the underlying asset's spot price by a funding rate mechanism. It is one of the most common derivative products on cryptocurrency exchanges.
Traditional futures contracts expire on a specific date; perpetual contracts, on the other hand, can stay open indefinitely as long as the position is not closed or liquidated. To keep the price from drifting away from the spot market, a funding payment is made between long and short position holders at set intervals, usually every few hours. If the contract trades above the spot price, the long side pays the short side; if it trades below, the reverse applies.
These products are mostly used with leverage. For example, with 10x leverage, 1,000 dollars of collateral is enough to open a 10,000 dollar Bitcoin position. When the price moves 5 percent in your favor, the gain is half of the collateral, while a move approaching 10 percent against you can lead to the position being closed out (liquidation). Perpetual contracts are offered on both centralized exchanges and decentralized platforms such as dYdX.
High leverage can cause cascading liquidations during sudden price moves. When the funding rate stays in the same direction for a long time, the cost of keeping a position open also rises noticeably. For this reason, perpetual contracts are considered complex instruments that require risk management knowledge.
Last updated: · This content is for information purposes only and is not investment advice.