What is Perpetual - Understanding the Perpetual Futures Contract

Perpetual is a type of cryptocurrency derivative with very unique characteristics. Although perpetual futures contracts are very similar to traditional forward contracts, there are important differences that every trader needs to understand to optimize their strategies.

Perpetual Has No Expiration Date – The Key Difference

The first and most obvious difference between forward contracts and perpetual contracts is the expiration date. While forward contracts have a predetermined settlement date—at which the position is automatically settled—perpetual contracts operate completely differently.

With perpetual contracts, traders can maintain their positions indefinitely, as long as their account has sufficient margin to cover losses and prevent liquidation. This offers greater flexibility compared to forward contracts, allowing traders to hold positions for a long time without worrying about an approaching expiration date.

Funding Fee – The Price Balancing Mechanism of Perpetual

However, the freedom that perpetual contracts offer also introduces a challenge: how to prevent the perpetual price from diverging too much from the asset’s spot price in the market?

This is where the funding fee plays a role. The fee acts as an automatic mechanism to keep the perpetual price aligned with the market’s actual price. It’s important to understand that the funding fee is an amount exchanged directly between the buyer and the seller—meaning the buyer and seller transfer funds to each other directly, not collected by the exchange.

When the perpetual price is higher than the spot price, traders holding long positions must pay the funding fee to those holding short positions. This creates a natural incentive for the perpetual price to decrease toward the spot price. Conversely, when the perpetual price is lower than the spot price, long positions receive the funding fee from short positions, encouraging the price to rise.

Why Perpetual Is a Popular Choice

Thanks to these features, perpetual contracts have become a highly favored trading instrument. Traders use perpetual contracts because they offer flexibility, high liquidity, and the ability to hold long-term positions without being constrained by an expiration date. This is why perpetual contracts are important and why they deserve attention in cryptocurrency trading strategies.