What is a perpetual future? Funding, leverage, and liquidation, explained
Perpetual futures account for over 75% of crypto derivatives volume. They have no expiry, use a funding rate to anchor to spot, and liquidate positions automatically. Here is the full mechanics.
BitMEX listed the first perpetual swap on 13 May 2016 — an instrument that did not exist anywhere in regulated derivatives markets, because it should not have worked. A futures contract without an expiry date breaks the convergence mechanism that anchors every other futures product to its underlying. Arthur Hayes’s team solved that problem with a funding rate paid every eight hours between longs and shorts, effectively pulling the perp price back toward spot through a continuous cash flow rather than a discrete settlement. Ten years on, perpetuals account for roughly $150-200 billion of daily notional volume across Binance, Bybit, OKX, Hyperliquid, and the dYdX chain — comfortably more than crypto spot markets and roughly 75-80% of all crypto derivatives turnover.
What is at stake is that most retail crypto trading happens on these instruments, often at 25-100x leverage, and the people pulling the trigger frequently cannot explain how funding works or where the liquidation engine puts the bid. Coinglass logs roughly $400m of long liquidations on a normal volatile day and over $2bn on a flush. Those numbers are not a market accident — they are the product’s design, doing exactly what it is supposed to do, transferring capital from undercapitalised traders to the insurance fund and to the counterparty taking the other side. Understanding the funding-leverage-liquidation triangle is the price of admission to any conversation about crypto microstructure.
The funding rate, in mechanics
Every perp has an index price (the spot reference, typically a volume-weighted basket of major exchanges) and a mark price (the perp’s own trading price plus a fair-value premium calculation). When the mark trades above the index, longs pay shorts; when it trades below, shorts pay longs. The payment occurs at fixed intervals — every eight hours on most venues (00:00, 08:00, 16:00 UTC), every one hour on Bybit’s premium tier, every block on Hyperliquid. The rate itself has two components: a premium (the recent average gap between mark and index) and an interest component (typically a fixed 0.01% per eight hours, representing the carry differential). A funding rate of 0.01% per eight hours annualises to roughly 10.95% — useful to know when you are long for a week and the rate has been flat-positive the whole time.
Reading the funding rate as a sentiment gauge
Aggregate funding rates are one of the cleanest sentiment proxies in the asset class because they reflect actual money changing hands rather than survey responses. When BTC-PERP funding sits above 0.05% per eight hours (54% annualised) across all major venues for several days, longs are crowded and overpaying — historically a setup for sharp deleveraging. When funding turns deeply negative (-0.03% or worse), shorts are crowded and the next squeeze tends to be violent. The chart of cumulative funding versus price has been one of the most reliable mean-reversion signals since 2020, with the caveat that it works on a 3-7 day horizon, not intraday. Our fear and greed dashboard incorporates a funding-stress component for exactly this reason.
| Funding rate (per 8h) | Annualised | Typical regime | Implied positioning |
|---|---|---|---|
| +0.10% | +109.5% | Euphoria | Longs heavily crowded, squeeze risk |
| +0.03% to +0.05% | +33% to +55% | Strong uptrend | Longs paying, healthy |
| +0.01% | +10.95% | Neutral-baseline | Default carry component |
| 0% to -0.01% | 0% to -10.95% | Soft | Marginal short bias |
| -0.03% or worse | -33% or worse | Capitulation | Shorts crowded, squeeze risk |
Leverage and margin: isolated versus cross
A perp position is collateralised by an initial margin (the deposit required to open) and maintained above a maintenance margin (the threshold below which liquidation triggers). At 10x leverage, initial margin is 10% of notional, with maintenance margin typically around 5%. At 100x, the buffer between initial and maintenance shrinks to a few basis points — a 1% adverse move wipes you out. The choice of isolated versus cross margin matters more than the headline leverage number. In isolated mode, the position can only lose the margin specifically assigned to it; the rest of your account is ring-fenced. In cross mode, your entire wallet collateralises every open position, which lowers liquidation risk on any single trade but means one bad position can drain everything. Professional traders almost universally run isolated margin on directional bets and cross only on hedged structures.
The liquidation engine, step by step
When mark price crosses the liquidation level, the exchange’s risk engine takes over the position. On most venues the sequence is: (1) the exchange cancels your open orders to free margin; (2) if maintenance margin is still breached, the position is handed to the liquidation engine, which attempts to close it on the order book; (3) any shortfall is absorbed by the insurance fund, which is itself capitalised by liquidation fees and the difference between bankruptcy price and execution price; (4) if the insurance fund is exhausted in a major flush, auto-deleveraging (ADL) kicks in, force-closing the most profitable opposite-side positions to socialise the loss. Binance’s insurance fund sits around $1.1bn; Bybit’s, around $400m; Hyperliquid runs a transparent on-chain vault you can inspect at app.hyperliquid.xyz/vaults.
Why perps dominate spot
- Capital efficiency. A $10,000 deposit controls $100,000-$1,000,000 of notional. Spot needs full collateralisation.
- Shortability. You can short any listed token with no borrow constraint, unlike spot margin which depends on lender availability.
- 24/7 access. No exchange holidays, no settlement windows, no T+2.
- Tight spreads on top of book. Major BTC perps trade at 0.1-0.5 bps spread, tighter than most spot venues.
- No custody friction. The position is a margin entry, not a coin transfer; no withdrawal fees, no on-chain confirmation wait.
The basis trade: why funding exists in the first place
Funding is paid by the side of the market that the structural arbitrage is pulling away from. When positive, sophisticated capital sells the perp and buys spot, collecting funding while remaining delta-neutral. When negative, the reverse: buy perp, short spot (or borrow and sell). At scale this is the “cash-and-carry” trade that desks like Galaxy, Cumberland, and Hidden Road run continuously. It is the reason funding rarely stays at 100%+ annualised for long: capital floods in until the spread compresses. Retail traders who think they have spotted a free 30% yield by going long spot and short perp are correct about the mechanics but usually wrong about the execution costs, the exchange counterparty risk, and the margin requirements for the short leg. We break out the live basis on our trading tools page.
Regulatory status, jurisdiction by jurisdiction
Perpetuals are unavailable on regulated US venues. The CFTC has signalled openness to listing a regulated equivalent — Coinbase received a Futures Commission Merchant approval and began offering 1-month and 2-month dated nano BTC futures, but no true perpetual yet. The Commodity Exchange Act’s contract-design rules effectively require an expiry date, so any US perp will likely take the form of a daily-rolling future with funding-equivalent settlement. In the EU, MiCA does not address perps directly; they fall under MiFID II derivatives rules and are restricted to professional clients on most regulated venues. Singapore, Hong Kong, and Dubai have built bespoke licensing regimes (MAS, SFC, VARA respectively). The bulk of perp volume continues to clear on offshore venues — Binance, Bybit, OKX — under varying interpretations of local rules, with restricted-jurisdiction blocks for US, UK retail, and a growing list of others.
Practical rules if you are going to trade them
On-chain perps: Hyperliquid, dYdX, GMX
The on-chain perp category has gone from curiosity to legitimate venue in two years. Hyperliquid, launched on its own L1 in late 2023, now clears $3-6 billion of daily volume with sub-second matching and an on-chain order book — numbers that put it within striking distance of mid-tier centralised venues. dYdX migrated from StarkEx (Ethereum L2) to its own Cosmos chain in late 2023 and runs a comparable orderbook model. GMX took a different design path: instead of an orderbook, it uses a pool-versus-trader model where the GLP liquidity pool takes the other side of every trade and prices it off a Chainlink oracle. Each design has tradeoffs — orderbooks offer tight spreads but require sophisticated market makers, pool models offer instant fills but suffer from oracle manipulation risk and adverse selection by informed traders. The on-chain category captures roughly 8-12% of total perp volume today, up from under 2% in 2022.
Three things matter more than your directional view. First, size to the liquidation level, not the entry: calculate the percentage adverse move that wipes you out and ask whether that move is likely within your holding horizon. For BTC, a 5% intraday move is normal; for a mid-cap altcoin perp, 20% is normal. Second, watch funding when you size up: a position paying 0.05% per eight hours costs 0.15% per day, which compounds quickly on a leveraged book. Third, prefer isolated margin and use exchange-native stop orders rather than mental stops — in a real liquidation cascade, web UIs lag and API rate limits bite. The traders who survive multiple cycles are the ones who treat the perp as the leveraged, path-dependent instrument it is, rather than as “Bitcoin, but bigger.” Use our liquidation calculator before entering anything above 3x, and keep the aggregated liquidation map open in another tab.
Why the dated-future market still matters
Perpetuals dominate volume but dated CME futures and quarterly contracts on Deribit, OKX, and Binance carry information that perps do not. The term structure — the price of BTC delivery three, six, and nine months out — is the cleanest available measure of expected funding over that horizon. When the December future trades at a 12% annualised premium to spot, the market is pricing roughly that level of cumulative funding over the period; if perp funding prints higher than that, the basis trade is open and capital floods in to close it. The CME Bitcoin futures complex specifically gives you regulated, surveillance-shared price discovery that perps cannot match, and is the reference for spot ETF NAV calculations. Reading the curve on a daily basis is one of the highest-information-density habits a serious trader can adopt; the Deribit DVOL volatility index alongside is the implied-volatility complement.