Perpetual futures are crypto contracts with no expiry date, so you can hold a position for as long as your margin lasts. To keep their price close to the price of the coin itself, they use a funding rate: a regular payment between traders who are long and traders who are short. The exchange does not keep this payment, it passes from one side to the other, and it can cost you money even when your trade is not moving.
In brief
- Perpetual futures are contracts that follow the price of a coin with no expiry date, usually settled in cash rather than in coins.
- The funding rate is a payment between longs and shorts, designed to keep the contract price close to the spot price.
- When the contract trades above the spot price, longs usually pay shorts, and when it trades below, shorts usually pay longs.
- Funding is a running cost or income that depends on the position size, the rate and the time you hold it, so it adds up on long trades.
- Leverage and liquidation risks remain, and the funding rate can change quickly, so read your exchange's rules before you trade.
In this article · 11 min read
- Perpetual futures: a short definition
- Why a funding rate exists
- Who pays whom
- How funding is calculated: an example from Kraken
- What funding costs: a simple illustration
- Reading the funding rate
- Risks of perpetual futures
- Perpetual or dated futures?
- How to approach perpetual futures, step by step
- Checklist before opening a position
- Who it is for
- Key terms
- Frequently asked questions
- Sources
Perpetual futures: a short definition
A study by researchers at Washington University in St. Louis and the University of Copenhagen describes perpetual futures, also called perpetual swaps, as the most popular crypto derivatives: they give leveraged exposure to a coin without owning it and, because they never expire, without rolling the contract over. To limit the gap between the contract price and the spot price, one side periodically pays the other a funding rate in proportion to that gap.
The same study traces the idea to the economist Robert Shiller in 1993, and the first crypto perpetuals to the derivatives exchange BitMEX in 2016. If you are new to the basics of margin and leverage, start with our guide to crypto futures trading and come back here for the part that is specific to perpetual contracts.
Why a funding rate exists
A dated future has a natural anchor: at expiry, its price must meet the spot price. A perpetual contract never expires, so it needs another way to stay in line. That is the job of the funding rate.
- The exchange compares two prices. One is the contract price, the other is an index that follows the spot market. The gap between them is called the premium.
- A funding rate is set from that premium. The bigger the gap, the larger the rate, often up to a cap fixed by the exchange.
- Positions on one side pay the other. If the contract trades above the index, longs usually pay shorts. If it trades below, shorts usually pay longs.
- The payment nudges the price back. Paying to stay long becomes less attractive when the contract is expensive, and being short becomes more attractive, so trading pressure tends to pull the contract towards the index.
This is a design goal, not a guarantee: in fast markets the contract can stay away from the index for a while.
Who pays whom
| Positive funding | Negative funding | |
|---|---|---|
| Contract price compared with the index | Above | Below |
| Who usually pays | Longs pay shorts | Shorts pay longs |
| What it often reflects | Many traders betting on a rise | Many traders betting on a fall |
| Effect on a long position | A cost | An income |
| Effect on a short position | An income | A cost |
The sign and the size of the rate change from one period to the next, and the details differ between exchanges. Always check on your platform how often funding is paid and how the rate is calculated.
How funding is calculated: an example from Kraken
Each exchange publishes its own formula. Kraken's perpetual contract specifications describe one way of doing it for the contracts they cover. The funding period is one hour. During it, the premium of the contract over the index is sampled every minute, the average is taken, and it is divided by a multiplier of 24, so that a premium takes about a day to be realised. The rate is limited to a range of plus or minus 0.25% per hour, and the amount accrues continuously and is settled at the end of each hour.
Kraken's own example: if the average premium is 0.36% over an hour, the funding rate is 0.015%, so over 24 hours the 0.36% is paid in full. The specification also states that when the premium is above zero, longs pay shorts.
Contracts on other exchanges, or other contracts on the same exchange, can use different periods, caps and formulas, so treat this as an example and not as a rule.
What funding costs: a simple illustration
Funding is calculated on the size of the position, not on your margin. With round numbers, only to show the arithmetic:
- Position size: 10,000 in the account currency.
- Funding rate: +0.01% per hour (not a typical rate, just an easy one).
- Payment: 10,000 × 0.01% = 1 per hour, or about 24 per day.
If you are long, that is a cost of about 24 a day. If you are short, it is an income of about 24 a day. If the rate flips sign, the situation flips too. With leverage, the position is large compared with your margin, so the same payment weighs much more on your capital than on the position. This is why funding matters most to people who keep positions open for days or weeks, and much less to people who open and close within a few minutes. Over our years of trading, we have made a habit of checking the rate before opening any position we expect to hold for more than a day.
For a sense of how large the gap between futures and spot prices can become, a Bank for International Settlements working paper on crypto carry reports that the carry of crypto futures, the difference between futures and spot prices, can become very large, up to 60% a year, and varies strongly over time. The paper is about futures in general, but it shows why the premium, and therefore the funding, is not a small detail.
The study on perpetual contracts quoted above gives a closer measure. Comparing each contract with its theoretical fair value, it found that from 2020 to March 2024 the average gap, in either direction and expressed as a yearly rate, was 52% for bitcoin, 63% for ether, 84% for cardano (ADA), 86% for dogecoin and 90% for BNB. The authors also note that these gaps have narrowed over time.
Reading the funding rate
Many traders look at the funding rate as a rough picture of the mood in the market:
- Strongly positive funding often means many traders are long, with leverage. It can show optimism, and also a crowded trade.
- Strongly negative funding often means many traders are short.
- Funding close to zero usually means the contract trades close to the index.
Treat it as one piece of context and not as a signal. Funding can stay high for long periods while the price keeps moving in the same direction, and it can reverse without warning. No indicator predicts the market reliably.
Risks of perpetual futures
The Commodity Futures Trading Commission (CFTC), a futures market regulator, states in its customer advisory on virtual currency trading that entering futures contracts through leveraged accounts can amplify the risks of the product, and that customers may lose more than their initial investment. European supervisors, including the European Securities and Markets Authority (ESMA), warned in 2022 that many crypto-assets are very risky and speculative and that you may lose all the money you invest.
The risks specific to perpetual contracts:
- Funding costs build up. A small hourly rate becomes a large cost on a long trade, especially with a big position.
- Rates change. A trade that earned funding yesterday can pay it tomorrow.
- Liquidation. Leverage makes a position fragile: if the price moves against you and your margin runs low, the exchange closes it, usually at a loss.
- Auto-deleveraging (ADL). In very volatile periods, some exchanges force profitable traders to give up part of their profits to cover the losses of the other side. A 2025 study of ADL calls it a last-resort mechanism and reports that on 10 October 2025 it closed $2.1 billion of positions in 12 minutes on one exchange.
- Exchange rules and counterparty risk. The platform holds your collateral and decides the formula, the cap and the settlement.
Our articles on leverage and on stop loss and take profit explain how to size a position and place an exit before you enter.
John Bax's view
In Lazy Investor, Smart Investor, John Bax insists on a stop loss for every trade, even a manual one, and on setting the entry, stop loss and take profit in advance to keep emotions out of the decision. He adds a warning: if you simply set these orders and walk away, you are unlikely to get consistent results. With perpetual futures this counts twice: the stop protects you from liquidation, and checking the position regularly shows what funding is costing you while it stays open.
Perpetual or dated futures?
| Perpetual futures | Dated futures | |
|---|---|---|
| Expiry | None | A fixed date |
| Keeping the price in line | Funding rate | Convergence at expiry |
| Main costs | Fees and funding | Fees and the premium over spot |
| Holding for a long time | Funding accumulates | Needs a roll to the next contract |
| Typical use | Active, short-term trading | Exposure up to a set date |
Perpetual contracts are the kind of market many automated systems use. Our overview of the crypto trading bot explains what a bot does and where it can go wrong. Crypto Go Bot, which we built, trades on your own Kraken account through a Futures trading API that you create, and it places take profit and stop loss as real orders on Kraken. The bot runs on your own server and cannot withdraw from your account. Futures costs, such as funding, still apply to the positions it opens, and losing trades are normal: no setting rules out losses.
For a longer explanation of how perpetual contracts work and why they have become one of crypto's largest markets, this video from a16z crypto's Frontier channel is a useful complement.
How perpetual futures work and why they matter (a16z) (in English)
How to approach perpetual futures, step by step
- Learn the basics first. Know what margin, leverage, long, short and liquidation mean before you risk money.
- Read the contract rules. Find how often funding is paid, how it is calculated, and its cap.
- Check the current rate before you open. Many platforms show the current and the predicted funding rate on the order screen.
- Count the cost of holding. Multiply the rate by the position size and the time you plan to stay in.
- Use low leverage and an exit plan. Place the stop loss before you enter, and keep it before the liquidation price.
- Start small. Use an amount you can afford to lose, and review every trade, including the funding paid or received.
Checklist before opening a position
- I know whether the funding rate is positive or negative, and who pays.
- I know how often funding is paid and what it adds up to over my holding time.
- My stop loss sits before my liquidation price.
- My leverage is low enough that a normal daily move will not liquidate me.
- I am using money I can afford to lose.
Who it is for
The funding rate matters to anyone who trades perpetual contracts, but not in the same way for everyone.
- Short-term active traders: they open and close within hours, so funding weighs little, but a settlement that falls while they are in a trade still counts.
- Traders who hold for days or weeks: for them funding becomes a real cost or income, to be added up before opening, just like fees.
- Holders who hedge with a short: someone who keeps coins and opens a small short to protect them receives funding while it is positive and pays it when it turns negative.
- Learners following the market: the rate gives a rough picture of how crowded longs or shorts are, as long as it is read as context and not as a signal.
Key terms
- Perpetual futures: futures contracts with no expiry date that follow the price of a coin.
- Funding rate: the regular payment between longs and shorts that keeps the contract close to the spot price.
- Premium: the gap between the contract price and the index of the spot price.
- Index price: a reference price built from the spot market, used to measure the premium.
- Liquidation: the forced closing of a position when the margin runs too low.
- Auto-deleveraging (ADL): a last-resort mechanism where profitable traders give up part of their gains to cover losses on the other side.
Frequently asked questions
What are perpetual futures?
They are futures contracts with no expiry date that follow the price of a coin and are usually settled in cash. A funding rate keeps their price close to the spot price, so you can hold a position as long as your margin allows.
What is the funding rate in crypto?
It is a regular payment between longs and shorts on a perpetual contract. It is calculated from the gap between the contract price and an index of the spot price, and it is designed to keep the two close.
Who receives the funding payment?
Not the exchange: the payment goes from one side of the market to the other. When funding is positive, longs usually pay shorts, and when it is negative, shorts usually pay longs. Check your platform, because rules and fees differ.
How often is funding paid?
It depends on the exchange and the contract. Some settle every hour, as in the Kraken example above, and others at longer intervals, so check the contract details before you trade.
Can I lose money on funding even if the price does not move?
Yes. If you hold a position on the paying side, funding is deducted for as long as you stay in, even if the price is flat. Over days, it can become a real cost.
Are perpetual futures suitable for beginners?
They are a high-risk product because of leverage and liquidation. Most beginners should first learn spot markets and risk management, and if they try perpetuals, use a small amount, low leverage and a stop loss.
Sources
- Wikipedia, Perpetual futures
- He, Manela, Ross and von Wachter, Fundamentals of Perpetual Futures, study, version of September 2026
- Tarun Chitra, Autodeleveraging: Impossibilities and Optimization, study, 2025
- Kraken Support, Perpetual Futures Contract Specifications
- Bank for International Settlements, Crypto carry (Working Paper 1087)
- CFTC, Customer Advisory: Understand the Risks of Virtual Currency Trading
- ESAs (EBA, ESMA, EIOPA), Warning on the risks of crypto-assets, 2022
