Crypto Futures and Perpetuals: A Derivatives Explainer

Futures and perpetual swaps are the two most common crypto derivatives, and they’re widely used both by traders seeking leveraged exposure and by market participants managing risk. Building on our spot vs derivatives guide, this explainer digs into how these specific contracts actually work.

Futures contracts: an agreement to trade later, at today’s terms

A futures contract is an agreement to buy or sell an asset at a predetermined price on a specific future date, regardless of what the market price actually is when that date arrives. Traditional commodity futures markets developed originally so producers and buyers (say, a farmer and a grain buyer) could lock in prices in advance and manage risk; crypto futures serve a similar risk-management function for some participants, alongside widespread use for pure speculation on price direction without any underlying hedging need. Regulated crypto futures, like those listed on CME Group, trade under CFTC oversight with standardized contract terms and centralized clearing.

Contango and backwardation, briefly

A futures contract’s price doesn’t have to match the current spot price exactly. When futures trade above the spot price, the market is in “contango,” often reflecting the cost of carrying a position forward in time or general bullish positioning; when futures trade below spot, it’s called “backwardation,” which can reflect bearish positioning or short-term supply and demand imbalances. The size of this gap (the “basis”) is itself a data point some traders watch as a rough gauge of market positioning, though it isn’t a reliable standalone predictor of future price direction, since it also reflects factors like the cost of capital and hedging demand at that moment.

Perpetual swaps: futures with no expiration date

A perpetual swap, or “perp,” works like a futures contract but never expires, letting traders hold a leveraged position indefinitely as long as they maintain sufficient margin. Since there’s no expiration date to naturally pull the contract’s price back in line with the spot market, perpetuals use a different mechanism entirely: the funding rate.

How the funding rate keeps perps tethered to spot

Periodically (often every few hours), one side of a perpetual swap market pays the other a funding payment, based on the difference between the perpetual’s trading price and the underlying spot price. If the perpetual is trading above spot, traders holding long positions typically pay traders holding short positions, which creates an economic incentive that tends to pull the perpetual’s price back toward spot; the reverse happens when the perpetual trades below spot. The funding rate itself is publicly visible on most platforms and is sometimes used as a rough sentiment gauge — persistently high positive funding can indicate heavily leveraged long positioning — though, again, this is a descriptive signal, not a reliable trading strategy, and funding rates can flip direction quickly as positioning shifts.

Margin, leverage, and liquidation mechanics

Trading futures or perpetuals typically requires posting margin — collateral backing the position — and platforms offer varying leverage multiples that determine how large a position that margin can control. Two common margin modes exist: isolated margin, where only the margin allocated to a specific position is at risk if it moves against you, and cross margin, where your entire account balance can be used to prevent liquidation of an open position, at the cost of potentially larger total losses if things go wrong. If a position’s losses erode margin below a maintenance threshold, the platform automatically liquidates it, closing the position, often at a worse price than the trader would have chosen given the chance, and typically with a liquidation fee on top, which further reduces whatever margin remains after the forced closure.

Why traders use these products at all

Beyond speculation, derivatives serve real risk-management purposes. A miner with ongoing production can sell futures to lock in a price for future output, reducing exposure to a price decline before that output is sold. A holder of a large spot position might use a short futures or perpetual position to hedge against a temporary downturn without actually selling their underlying holdings, which can also have tax implications depending on the jurisdiction and the specific structure used. Institutions sometimes use derivatives to gain or reduce exposure more efficiently than trading the underlying spot asset directly, particularly around custody or balance-sheet considerations.

A word on options, briefly

Options are a third major derivatives category: a contract giving the buyer the right, but not the obligation, to buy (a call) or sell (a put) an asset at a set price by a certain date, in exchange for an upfront premium paid to the option’s seller. Because the buyer’s maximum loss is generally limited to that premium, options have a different risk profile than futures or perpetuals, where losses can scale directly with the size and duration of an adverse price move. Options markets on crypto assets exist both on regulated US venues and on offshore platforms, with the same general regulatory distinctions described elsewhere in this guide applying.

Where regulation draws a hard line for US retail users

Regulated CFTC-compliant exchanges impose leverage limits and eligibility requirements well below what many offshore perpetual swap platforms offer, some of which advertise extremely high leverage multiples to retail traders with minimal restriction. Offshore platforms offering that kind of access typically aren’t licensed to serve US retail customers, and using them can carry both counterparty risk (no CFTC oversight of the platform’s solvency or conduct) and, depending on how the platform screens users, legal risk for accessing an unregistered market, along with the loss of any recourse if the platform mishandles funds or halts withdrawals. This is one of the more consequential practical differences covered in our CFTC vs SEC guide.

Frequently asked questions

What’s the difference between a futures contract and a perpetual swap?

A futures contract has a fixed expiration date, after which it settles. A perpetual swap has no expiration and instead uses a periodic funding rate payment between long and short traders to keep its price tethered to the underlying spot market.

Can a leveraged position be liquidated even if I never wanted to close it?

Yes. If losses erode your margin below the platform’s maintenance threshold, the position is automatically closed by the platform to prevent losses beyond what your margin can cover, regardless of your own intentions to hold it longer.

Is high leverage available to US retail traders?

Regulated CFTC-compliant platforms generally impose meaningfully lower leverage limits than many offshore platforms. Very high leverage products marketed to US retail users typically indicate a platform operating outside standard US regulatory oversight.

What is the difference between isolated and cross margin?

Isolated margin limits risk to the collateral allocated to a single position; cross margin uses your whole account balance to prevent liquidation of a position, which can save that position but risks larger total account losses if the trade continues moving against you.