Perpetual Contracts Explained
Perpetual contracts ("perps") are the dominant trading instrument in crypto, accounting for over 70% of all crypto trading volume.
How Perps Work
A perp is a futures contract with no expiry date. It tracks the price of an underlying asset (BTC, ETH, SOL, etc.) and lets you trade with leverage.
- Long: Profit when price goes up
- Short: Profit when price goes down
- Leverage: Amplify your exposure (2x, 5x, 10x, 50x, 100x)
You don't own the underlying asset. You're trading a contract based on its price.
Funding Rates
Since perps don't expire, they use a funding rate mechanism to keep the contract price close to the spot price:
- When perps trade above spot: Longs pay shorts (positive funding)
- When perps trade below spot: Shorts pay longs (negative funding)
- Funding is exchanged every 8 hours on most exchanges
Why it matters: In a bull market, you might pay 0.01-0.1% every 8 hours to hold a long. Over time, this adds up.
Leverage & Liquidation
Leverage is a double-edged sword:
| Leverage | 10% price move for you | 10% price move against | |----------|----------------------|----------------------| | 1x | +10% profit | -10% loss | | 5x | +50% profit | -50% loss | | 10x | +100% profit | -100% = LIQUIDATED | | 50x | +500% profit | -2% move = liquidated |
Liquidation = the exchange forcefully closes your position because your margin is depleted. You lose your entire position margin.
Leverage & Liquidation Visualizer
See how leverage amplifies both gains AND losses
Leverage
10x
Position Size
$10,000
Liquidation Price
$54,000
Liq. Distance
10.0%
Best Practices
- Use low leverage (2-5x max as a beginner)
- Always set a stop loss before the liquidation price
- Watch funding rates — high funding means crowded trades
- Size based on dollar risk, not leverage
- Understand isolated vs cross margin
Key Takeaway
Perps are powerful tools but they amplify both gains and losses. The leverage itself isn't the risk — improper position sizing with leverage is.