What are perpetual futures? Perps, funding rates, and liquidations explained

Perpetual futures, or perps, are the most traded instrument in crypto. They let you bet on price with leverage and never expire, held in line with the spot market by a clever fee called the funding rate. They are powerful, they are dangerous, and in 2026 they are finally arriving onshore in the United States.

A perpetual future, usually shortened to perp, is a derivative contract that lets a trader bet on the price of an asset with leverage and hold that bet open indefinitely, because unlike a traditional futures contract it has no expiration date. The price of a perp is kept tethered to the real spot price of the underlying asset by a recurring payment between traders called the funding rate, which nudges the contract back toward the market whenever it drifts. 

Perps let you go long if you think the price will rise or short if you think it will fall, control a position far larger than the cash you put down, and never worry about a contract expiring out from under you. That combination has made perpetual futures the single most heavily traded product in all of crypto, and also one of the fastest ways to lose money in it.

This guide explains perpetual futures in plain English, with no derivatives background assumed. It covers what a perp actually is, the traditional futures contract it evolved from, the funding-rate mechanism that makes the whole thing work, how leverage and margin lead to liquidation, the difference between mark price and index price that decides when you get liquidated, where perps are traded and the major shift happening in the United States in 2026, the real risks that blow up accounts, and why this instrument came to dominate crypto trading. 

By the end, you will understand not just how to read a perp but why it behaves the way it does, and why even regulators who now permit it call it a product to treat with respect.

What a perpetual future actually is

The name packs two ideas together. “Future” means it is a contract whose value is derived from the price of something else, a derivative, where you agree to gain or lose money based on how that price moves without necessarily owning the asset. “Perpetual” means the contract never expires, so you can hold the position open for as long as you like and your margin allows.

That second word is the whole innovation. A perp lets you take a leveraged bet on, say, Bitcoin, and simply keep it open, adjusting or closing whenever you choose, with no expiry forcing your hand. You can go long, profiting if the price rises, or short, profiting if it falls, and because the contract is leveraged, you can put down a fraction of the position’s value as collateral, called margin, and control the full size. 

If you post one thousand dollars at ten times leverage, you control a ten-thousand-dollar position, so a ten percent move in your favor doubles your collateral, and a ten percent move against you wipes it out. The perp itself is settled in cash or a stablecoin, so you never have to take delivery of the underlying asset; you are trading the price, not the coin.

The product was invented by the crypto exchange BitMEX in 2016, and it spread because it fit crypto perfectly: traders wanted leverage, they wanted to bet in both directions, and they did not want the friction of contracts that expire and have to be rolled over. The perp gave them a single instrument that did all of that, and the rest of the market followed.

Futures first: the contract perps evolved from

To see what makes a perp special, it helps to understand the ordinary futures contract it grew out of, because the perp is essentially a futures contract with its biggest inconvenience removed.

A traditional futures contract is an agreement to buy or sell an asset at a set price on a specific future date. If you buy a Bitcoin futures contract expiring in three months, you are locking in a price now for settlement then, and when that date arrives, the contract expires and settles. 

This is useful, and it is how commodities and financial futures have worked for a very long time, but it has an awkward feature for someone who simply wants ongoing leveraged exposure: the contract ends. If you want to keep your position past the expiry, you have to “roll” it, closing the expiring contract and opening a new one further out, paying costs and friction each time. Traditional futures also have a “basis,” a gap between the futures price and the spot price that opens and closes as expiry approaches, which adds complexity.

The perpetual future strips out the expiry entirely. There is no settlement date, so there is nothing to roll and no countdown forcing you to act. But removing the expiry creates a new problem. In a normal future, the looming settlement date is what drags the contract price toward the real spot price, because at expiry they must converge. 

Take away the expiry, and you remove the very thing that keeps the contract honest. So the designers of the perp had to invent a replacement, a mechanism that would keep a never-expiring contract anchored to the spot price using market forces instead of a deadline. That mechanism is the funding rate, and it is the beating heart of every perp.

The funding rate: the mechanism that keeps perps honest

The funding rate is the single most important concept in perpetual trading, and it is the part beginners most often miss until it quietly costs them money.

Because a perp never expires, nothing automatically forces its price to match the spot price of the underlying asset. Left alone, a perp could drift well above or below the real market. The funding rate fixes this by creating a recurring payment, typically every eight hours, between the two sides of the market. 

When the perp trades above the spot price, meaning demand to be long is too strong, the funding rate is positive, and longs pay shorts. When the perp trades below the spot price, meaning shorts are crowded, the funding rate is negative, and shorts pay longs. The payment is a small percentage of position value, and it flows directly between traders, not to the exchange.

The effect is elegant. If too many people are long and the perp price runs above spot, longs must keep paying a fee to shorts, which makes holding a long more expensive and encourages traders to close longs or open shorts, pushing the price back down toward spot. The mechanism is self-correcting: whichever side is crowded pays the other, and that cost pulls the contract back in line with the real market. 

This is why a perp tracks spot closely without ever expiring. It also turns the funding rate into a live sentiment gauge, because a strongly positive rate tells you the market is aggressively long and paying for the privilege, while a negative rate tells you shorts dominate. Traders watch funding both as a cost they must pay or earn and as a signal of how the crowd is positioned. Even regulators who have studied perps note that funding rates, far from being a trick, perform roughly the same economic job as the costs of repeatedly rolling expiring futures, just packaged differently.

Leverage, margin, and the liquidation that follows

Leverage is what makes perps thrilling and what makes them lethal, so it is worth being precise about how it actually works and where it ends.

When you open a perp position, you post collateral, called margin, and the exchange lets you control a position several times larger. The multiple is your leverage. At five times leverage, a thousand dollars of margin controls five thousand dollars of exposure; at twenty times, it controls twenty thousand. Leverage magnifies both directions equally. A favorable move multiplies your gains against your small margin, and an unfavorable move multiplies your losses just as fast. The crucial consequence is that with leverage you do not need the price to go to zero to lose everything. You only need it to move against you by a fraction equal to your margin.

That is where liquidation comes in. Every leveraged position has a liquidation price, the level at which your losses have eaten through your posted margin. If the market reaches that price, the exchange automatically closes your position to prevent your losses from exceeding your collateral, and your margin is gone. At ten times leverage, a roughly ten percent move against you is enough to trigger liquidation; at twenty-five times, about four percent will do it; at one hundred times, a one percent flicker can end the trade. 

Offshore venues have historically offered enormous leverage, and the extreme figures sometimes quoted, fifty, one hundred, even more, are a hallmark of those unregulated platforms. Regulated perpetual products in the United States are subject to the same leverage limits as other regulated futures, which are far lower. High leverage does not make you more likely to be right; it only makes you more likely to be liquidated before you are proven right, and that distinction has emptied more accounts than any single price crash.

Mark price versus index price: why you actually get liquidated

A detail that confuses many new perp traders, and burns some of them, is that the price used to decide your liquidation is not always the last traded price on the exchange. Understanding this can be the difference between a survivable trade and an avoidable wipeout.

Exchanges track two prices. The index price is an average of the spot price across several major markets, a clean reading of what the asset is really worth right now. The mark price is a smoothed, fair value derived largely from that index, and it is the price the exchange uses to calculate your unrealized profit, your losses, and your liquidation. 

Why not just use the last traded price on the perp itself? Because the last traded price on a single venue can spike or crash briefly during a moment of thin liquidity or a manipulation attempt, and if liquidations were based on that, a momentary wick could liquidate thousands of traders unfairly. By marking positions to a broad index-based fair value instead, the exchange protects traders from being liquidated by a fleeting, unrepresentative blip on one order book.

The practical lesson is that you are liquidated when the mark price, not necessarily the screaming candle on the chart, reaches your liquidation level. Most of the time, mark and last price are nearly identical, but in violent moments they can diverge, and knowing which one governs your position is part of trading perps without nasty surprises. It is also why checking your exact liquidation price before entering a trade, and giving yourself a wide margin of safety, matters far more than guessing where the price “should” go.

Where perps are traded, and the 2026 shift onshore

For most of their history, perps lived offshore, outside the reach of United States regulators, and that map is being redrawn right now in a way every trader should understand.

On centralized exchanges, perps are a flagship product, with venues such as Binance, Bybit, OKX, Deribit, and the original inventor BitMEX offering deep perpetual markets in hundreds of assets. A newer wave runs perps fully on-chain through decentralized exchanges, where trades settle on a blockchain, and users keep custody of their funds. 

Hyperliquid has risen to dominate on-chain perpetual trading, alongside established names like dYdX and GMX, proving that a decentralized venue can match the speed and depth traders once thought only centralized platforms could provide. For years, United States traders were largely walled off from regulated crypto perps, pushing demand offshore.

That wall is now coming down. In May 2026, the Commodity Futures Trading Commission approved a Bitcoin perpetual futures contract from the prediction-market exchange Kalshi, the first regulated crypto perp cleared for United States traders, and Kalshi quickly expanded into perps tied to Ethereum, XRP, and others, reporting more than five billion dollars in trading volume within weeks. Coinbase secured its own regulated route to offer perpetual products domestically.

The arrival has not been smooth. The CME Group, the giant traditional derivatives exchange, sued the CFTC, arguing that perpetual futures should be regulated as swaps under the Dodd-Frank Act rather than as ordinary futures, and that the regulator bypassed proper procedure. 

The CFTC’s chair has pushed back publicly, arguing that nothing in the law requires a futures contract to have a fixed expiration date, that regulated perps face the same leverage limits as other United States futures rather than the extreme offshore multiples, and that funding rates are a legitimate pricing mechanism. However that legal fight resolves, the direction is clear: the most popular instrument in crypto trading is moving from the offshore shadows into regulated American markets, and the rules for it are being written in real time.

The risks: why perps blow up accounts

Perps deserve their fearsome reputation, and an honest guide has to be blunt about why so many traders lose, because the dangers are structural, not just a matter of bad luck.

The first and largest risk is leverage itself. The same multiplication that makes a winning perp trade so satisfying makes a losing one fatal, and at high leverage a small, ordinary price move is enough to liquidate you entirely, which is why most accounts that chase big leverage do not last. The second is liquidation cascades. 

When prices move sharply, waves of leveraged positions hit their liquidation prices at once, and the forced selling or buying pushes the price further in the same direction, triggering still more liquidations, a self-reinforcing spiral that can turn a modest move into a violent one and catch even careful traders. The third is funding cost. Holding a position on the crowded side of the market means paying funding every few hours, and over time that steady drain can quietly erode or erase a position that the price action alone would have left profitable. 

The fourth is the psychological trap: perps are available around the clock, they encourage constant action, and the leverage makes every move feel urgent, which pushes traders toward overtrading, revenge trading after a loss, and holding losers too long. The fifth, on offshore venues especially, is platform and counterparty risk, because you are trusting the exchange’s solvency, its liquidation engine, and its honesty with your collateral.

The uncomfortable summary is that perps are a professional’s instrument that retail traders can access with one tap, and the gap between those two facts is where the damage happens. The product is not a scam, and the mechanics are sound, but the combination of high leverage, constant availability, and human emotion is genuinely hazardous, and that is true no matter how confident any individual trade feels.

A worked example: one long trade, from open to liquidation

Numbers make the danger concrete in a way definitions cannot, so walk through a single leveraged trade step by step, because every concept in this guide shows up in the life of one position.

You have one thousand dollars, and you are convinced Bitcoin is about to rise. You open a long perp at ten times leverage, so your one thousand dollars of margin now controls a ten thousand dollar position. 

The exchange shows you a liquidation price roughly ten percent below where you entered, because a ten percent move against a ten-times position consumes your entire margin. You are also told the funding rate is positive, meaning longs are crowded, and you will pay a small fee to shorts every eight hours for as long as you hold. The trade is on.

Suppose Bitcoin rises five percent. Your position gained five percent of ten thousand dollars, or five hundred dollars, which is a fifty percent return on your one thousand dollar margin. This is the seduction of leverage: a modest move produced an outsized gain. Now suppose instead that Bitcoin falls. 

At a four percent drop, you are down four hundred dollars and nervous. At a move near ten percent against you, the mark price reaches your liquidation level, the exchange automatically closes the position, and your one thousand dollars is gone. Notice what did not happen: Bitcoin did not crash, it did not go to zero, it simply moved ten percent, an ordinary day in crypto, and your account was wiped out. 

Had you used two times leverage instead of ten, the same ten percent drop would have cost you two hundred dollars, painful but survivable. Had you used one hundred times leverage, a one percent flicker would have ended you.

Layer in the funding cost and the picture sharpens further. If you held that crowded long for several days, you paid funding every eight hours the whole time, a steady drain that eats into gains and deepens losses. And if the market dropped sharply, your liquidation might have been one of thousands firing at once, the forced selling pushing the price down faster and triggering still more liquidations around you. One trade, and you have lived through leverage, margin, the liquidation price, the mark price, funding cost, and a liquidation cascade. That is why experienced traders obsess over position size and liquidation distance before they ever think about where the price is going.

Why perps took over crypto trading

For all the danger, perps did not come to dominate by accident, and understanding why explains a great deal about how crypto markets actually function. A perp gives a trader almost everything they could want in a single instrument: leverage to amplify a view, the ability to profit in both rising and falling markets, no expiry to manage, a price kept honest by funding, and deep liquidity that makes entering and exiting easy. For speculators, it is the sharpest tool available. For sophisticated participants it is also a hedging instrument, a way to offset the risk of a spot holding or to manage exposure without buying or selling the underlying coin. That versatility is why perpetual futures now account for the large majority of all crypto trading volume, dwarfing the spot market most newcomers assume is the main event.

The instrument that BitMEX dreamed up in 2016 has become the center of gravity of crypto markets, and in 2026 it is crossing from the unregulated fringe into the regulated mainstream, with traditional exchanges fighting over how it should be classified. That trajectory tells you something important: perps are not a passing fad but a durable financial innovation that traditional finance is now scrambling to adopt and contain. The right way to approach them is with respect. Understand the funding rate, know your liquidation price, treat leverage as the dangerous tool it is, and never confuse the thrill of a leveraged win with skill. The traders who survive perps are the ones who understand the machinery before they ever pull the lever.

Frequently Asked Questions

This article is educational and does not constitute financial or investment advice. Perpetual futures are high-risk leveraged products, and the rules governing them, especially in the United States, are changing quickly. As of June 22, 2026, verify current product details, leverage limits, and regulatory status with official sources, and never trade with money you cannot afford to lose.