Perpetual Futures Explained: How Crypto Perps Work, Funding, Leverage and Risk

Editorial responsibility: Oliver Sinz · Last verified: October 14, 2026

A perpetual futures contract, usually called a "perp" or "perpetual swap," is a cash-settled derivative that gives you long or short exposure to an asset's price without owning the asset and without a scheduled expiry date. Because no settlement date forces the contract back to the spot price, perps rely on periodic funding payments between longs and shorts to pull the contract toward an index of spot prices. Most perps are traded on margin, so a modest move in the underlying can produce a large change in your account, and a position that runs short of margin can be closed automatically.

This guide explains each moving part (prices, funding, leverage, margin, fees and liquidation) and then puts them together in one fully calculated bitcoin position. All prices, rates and returns in the examples are hypothetical illustrations, not market data or forecasts.

What a perpetual futures contract is

A perpetual future is an agreement between a long and a short whose value follows a reference price. If the price rises, the long gains and the short loses the same amount, and the reverse holds when it falls. No coins change hands. Profits and losses settle in the contract's settlement currency, which for most crypto perps is a stablecoin, US dollars or the underlying coin itself.

The idea predates crypto. Economist Robert Shiller proposed a perpetual futures contract in a 1993 paper on cash-settled index derivatives. The design that crypto markets adopted came from BitMEX, which launched its XBTUSD perpetual swap on May 13, 2016 with no expiry and up to 100x leverage. Perps have since become the most popular crypto derivative (He, Manela, Ross and von Wachter), and CoinGecko's 2025 annual industry report puts 2025 perpetual volume at $86.2 trillion on the ten largest centralized perp exchanges and $6.7 trillion on the ten largest decentralized ones.

"No scheduled expiry" does not mean a position can never be ended for you. A perp position closes when you close it, when it is liquidated, or when the venue delists the contract. The original XBTUSD contract itself was delisted and settled early on September 16, 2026 after BitMEX decided to close its exchange. Venue risk is part of the product.

Perps vs. spot vs. dated futures

The structural difference is the anchor. A dated future must converge to its settlement price at expiry, so the gap between futures and spot, the basis, has a mechanical endpoint. A perp has no such date. Funding gives traders an incentive to close the gap, but it does not force the two prices together. Research on crypto perps finds that their deviations from no-arbitrage prices have been larger than those in traditional currency markets, although they have narrowed over time (He, Manela, Ross and von Wachter).

Linear and inverse contracts

Contract denomination changes the arithmetic, so it matters which kind you hold. A linear perp is quoted, margined and settled in the quote currency, such as USDT, USDC or US dollars. Its profit or loss is simply quantity × (exit price − entry price), measured in dollars. An inverse perp is denominated in US dollars but margined and settled in the coin. Its value in coin terms changes as the price moves; Bybit, for example, defines an inverse position's value as the contract quantity divided by the mark price (Bybit). That makes dollar P&L nonlinear and means your collateral moves with the market too. Everything below uses a linear contract.

Four prices you need to keep apart

• Index price: an aggregate of the asset's spot prices across several exchanges, used as the external reference. Binance uses a weighted average of multiple spot venues (Binance); Kalshi's bitcoin perp references the CF Benchmarks Bitcoin Real-Time Index (Kalshi).
• Mark price: the venue's smoothed estimate of the contract's fair value, combining the index with funding and order-book data. On Binance it is the median of three candidate prices (Binance). The mark price drives unrealized P&L and liquidation (Binance).
• Last price: the most recent trade in the perp itself, which is what most charts display.
• Execution price: what you actually receive when your order fills, after the bid-ask spread and any slippage. Realized P&L is based on executed prices.

The practical consequence is that a brief spike in the last price may not liquidate you if the mark price holds, while a position can be liquidated even if the chart's last price never touched your estimated threshold. Your actual exit price can differ from both.

How funding works

Funding is the periodic payment that does the job expiry does for dated futures.

• Direction. When the funding rate is positive, longs pay shorts. When it is negative, shorts pay longs (Bybit).
• Who receives it. Payments move between traders. Binance states that it charges no fee on funding payments.
• Payment basis. Funding payment = position value × funding rate, where a linear position's value is quantity × mark price at the funding time, not your entry notional (Binance; Bybit).
• Timing. On venues with scheduled funding times, such as Binance and Bybit, you pay or receive only if you hold a position at a funding timestamp. Binance's default is every eight hours, at 00:00, 08:00 and 16:00 UTC. Some other venues accrue funding differently, so check the contract's own rules.
• How the rate is set. On Binance and Bybit, the rate combines a premium index, which measures how far the perp's order book trades from the index, with an interest component that defaults to 0.03% per day, or 0.01% per eight-hour interval (some contracts use 0%). A clamp links them: rate = premium + clamp(interest − premium, −0.05%, +0.05%) (Bybit). As a result, whenever the premium index sits between −0.04% and +0.06%, the eight-hour rate simply equals the 0.01% interest component (Binance). On these venues, longs can pay shorts even when the perp trades right at the index. The common shorthand that "no premium means no funding" does not hold everywhere.
• Intervals and caps differ by venue and can change. Binance moves a contract from eight-hour to hourly funding when the previous settlement hits its cap or floor (Binance). Kalshi's bitcoin perp funds at 12:00 AM, 8:00 AM and 4:00 PM Eastern time, with a cap of ±2% per interval (Kalshi).
• Where the money comes from. Funding is debited from your available balance. If that is insufficient, it comes out of position margin, which can move the liquidation price closer, notably for isolated positions (Binance; Bybit).

Funding is a variable cash flow set by market positioning, not a fixed interest rate. The total you pay or receive depends on every rate that applies while you hold the position.

Leverage, margin and fees

Notional is quantity × price. Leverage at entry is notional ÷ margin, so a $50,000 position backed by $10,000 is 5x. Initial margin is the collateral needed to open the position. Maintenance margin is the minimum equity needed to keep it open. On Binance, maintenance margin = notional × maintenance margin rate − a maintenance amount, and the rate steps up in tiers as the position grows (Binance).

Leverage is not fixed after entry. Losses shrink your equity, so effective leverage rises. Gains do the opposite. Margin mode matters too: isolated margin limits the collateral at risk to what you assign to one position, while cross margin lets positions share the account's equity.

Trading fees are charged on notional, not on margin. Binance's own illustration uses 0.02% for makers and 0.05% for takers, which it describes as hypothetical rates. At 5x, a 0.05% fee on notional costs 0.25% of your margin each way.

A fully worked example: a 5x long BTC perpetual

Assumptions (all illustrative):

• Contract: linear BTC perpetual, margined and settled in a US-dollar stablecoin; isolated margin.
• Position: long 0.5 BTC, filled at $100,000.
• Margin: $10,000.
• Fees: 0.05% taker fee on fill notional, at entry and at exit.
• Funding: every eight hours; payment = 0.5 BTC × mark price × rate. Six funding timestamps fall during the holding period of a little over two days.
• Maintenance margin rate: 0.5% of notional, single tier, no maintenance amount.
• Fills occur exactly at the stated prices. No other positions or balances are in the account.

Step 1: Opening

Notional = 0.5 × $100,000 = $50,000. Leverage = $50,000 ÷ $10,000 = 5x. Entry fee = $50,000 × 0.05% = $25.00.

Step 2: Funding while the position is open

Each payment uses the mark price at that timestamp, so the funding bill grows as the position's value grows. At the Day 2 midnight timestamp the rate turned negative and the long received a small payment.

Step 3: Closing the position

The table compares two exits. To isolate the effect of direction, the down case keeps funding at $36.94. In practice, a falling market would produce different mark prices and, very likely, different rates.

For comparison, $10,000 in spot buys 0.1 BTC. The same 4% rise earns $400 before costs and $389.80 after the same illustrative 0.05% fee on each side, a 3.90% return. Leverage multiplied the price exposure by five. Fees and funding, $87.94 in total, took 0.88 percentage points off the 20% gross return on margin. Costs were small relative to the price move here, but because they scale with notional, they weigh more heavily in quieter markets and over longer holding periods.

Step 4: Who is on the other side

A short holding the same 0.5 BTC with the same fees would have lost $2,000 on price, received $36.94 in funding and paid $51 in fees, for a net of −$2,014.06 in the up scenario. Price P&L and funding are transfers between longs and shorts. Trading fees go to the venue. Before fees, the contract itself is zero-sum.

Step 5: Leverage drifts

Just before closing in the up scenario, equity is $10,000 − $25.00 − $36.94 + $2,000 = $11,938.06 against $52,000 of notional: 4.36x. In the down scenario, equity is $7,938.06 against $48,000: 6.05x. Losses raise effective leverage, so each additional 1% move consumes a larger share of what remains.

Step 6: A simplified liquidation estimate

In a single-position isolated model, liquidation occurs when equity falls to maintenance margin at mark price P:

M + Q × (P − E) = m × Q × P, so P_liq = (Q × E − M) ÷ (Q × (1 − m))

where M is margin, Q is quantity, E is entry price and m is the maintenance margin rate.

Every cost paid out of the position's own margin moves the threshold closer. The last two rows assume, as stated above, that no other funds are available to cover fees and funding.

Putting funding in annual terms. The average rate in this example, 0.012% per eight hours, equals 0.012% × 3 × 365 = 13.14% of notional per year by simple arithmetic. With notional at five times margin, that is roughly 65.7% of the initial margin per year. This calculation describes what would happen if that average persisted on a constant notional. It is not a forecast; actual rates change at every interval and can turn negative.

Why a liquidation estimate is not a guarantee

The figures above come from a model. Actual liquidation depends on each venue's rules:

• Real formulas include more inputs: tiered maintenance margin rates, maintenance amounts and, in cross margin, the balances and positions of the whole account (Binance).
• The trigger is the mark price, and it can jump. Binance illustrates how a short with a calculated liquidation price of 17,006 USDT could be liquidated at 17,100 USDT if the mark price jumped that far within a second (Binance).
• The process has several stages. Binance first tries to reduce the position with an immediate-or-cancel order and charges a liquidation clearance fee. A position whose remaining assets fall below zero becomes bankrupt, and Binance's insurance fund takes it over at the bankruptcy price. If the fund cannot absorb the loss, auto-deleveraging closes opposing profitable positions (Binance).
• Losses can exceed collateral. Kalshi's risk disclosure warns that gaps or illiquidity can produce a negative balance that the customer must cover (Kalshi).

Risks beyond price direction

• Path risk: a temporary drawdown can liquidate a position even if the price later recovers.
• Funding risk: rates vary, can move against you, and keep applying for as long as you hold the position.
• Reference-price risk: errors, outages or manipulation in index sources can affect mark prices, funding and liquidations. Venues add protections, such as Binance's caps on outlier index constituents, but those are venue rules, not guarantees.
• Liquidity and execution risk: slippage on entry, exit and forced liquidation.
• Auto-deleveraging: profitable positions can be reduced when a venue's loss-absorbing resources run out.
• Venue and counterparty risk: insolvency, outages, rule changes and delisting, as XBTUSD's early settlement showed.
• Jurisdiction: access, protections and leverage limits depend on where you are and which venue you use.

Perpetual futures in the US (status checked October 20, 2026)

For most of their history, crypto perps traded mainly on offshore venues, outside the US regulatory framework (CFTC). On May 29, 2026, the CFTC approved Kalshi's BTCPERP contract, a bitcoin perpetual, for listing on a CFTC-registered exchange. It also issued a policy statement saying perpetual contracts on other asset classes should go through case-by-case review.

Before then, the CFTC notes, Coinbase Derivatives had listed "perpetual-style" index futures that used a funding mechanism but carried long-dated expirations of up to 25 years. In CFTC Letter No. 26-29 of October 3, 2026, agency staff said they would not recommend enforcement action if exchanges removed the expiration dates from such contracts on broad-based security indexes, subject to conditions. The CFTC's October 5 announcement set October 20, 2026 as the expiry of those no-action positions; no later official extension was verified in the October 20 recheck. That deadline concerns the specified index-futures amendments, not an automatic end to all US-regulated crypto perpetuals or to the separately approved Kalshi bitcoin contract. The same letter records that a Kalshi perpetual on a broad-based security index was deemed approved on October 2, 2026.

Contract terms on US-regulated venues can differ sharply from offshore conventions. Kalshi's bitcoin perp, for instance, is linear and USD-margined, with 0.0001 BTC per contract, funding three times a day capped at ±2%, daily settlement cycles at noon and 4:00 PM Eastern time, and isolated margin in its apps (portfolio margin via API) (Kalshi). Its product page listed maximum bitcoin leverage of 6.3x when checked on October 14, 2026 (Kalshi). Regulatory status changes quickly; check the venue and your jurisdiction directly.

Frequently asked questions

How long can you hold a perpetual future? As long as you meet the margin requirements and the venue keeps listing the contract. On venues with scheduled funding times, you pay or receive funding at every timestamp you hold through.

Do perpetual futures track the spot price exactly? No. Funding pushes the perp toward its index, but premiums and discounts can persist, and nothing guarantees convergence at any particular time.

Is the funding rate a fee paid to the exchange? Not on major venues such as Binance and Bybit, where funding passes between longs and shorts. Trading fees, by contrast, go to the venue.

What is the difference between perpetual and standard futures? A standard future expires and converges to its settlement price. A perpetual has no scheduled expiry and relies on funding instead, so holding it creates an ongoing stream of funding payments rather than a single settlement.

Key takeaways

• A perp is a cash-settled contract on a price, with no scheduled expiry. It can still end through closing, liquidation or delisting.
• Funding is calculated on position value at the mark price, follows each venue's own schedule and formula, and on major venues is paid only by positions open at a funding timestamp. It is not fixed interest.
• Index, mark, last and execution prices serve different purposes. The mark price drives margin and liquidation.
• Leverage multiplies gains and losses on margin, and losses push effective leverage higher.
• Fees and funding scale with notional, and paying them out of a position's margin moves its liquidation price closer.
• Any liquidation estimate is a model. Real outcomes depend on tiered margin rules, price jumps, liquidity and the venue's liquidation process.