What are Perpetual Futures?

What are Perpetual Futures?

Perpetual futures, often called “perps,” are a type of futures contract that never expires. Unlike traditional futures that have a set settlement date, perpetual futures let you hold your position indefinitely. This makes them the most popular derivative product in crypto trading.

How Are They Different from Traditional Futures?

Traditional futures contracts have an expiration date. When that date arrives, the contract is settled and you must close your position or roll it over to a new contract. This creates inconvenience for traders who want to maintain long-term positions.

Perpetual futures solve this problem by removing the expiration entirely. You can open a position today and hold it for minutes, days, or months. There is no settlement date forcing you to act.

However, without an expiration mechanism, there needs to be another way to keep the perpetual contract price aligned with the actual asset price. This is where the funding rate comes in.

What is the Funding Rate?

The funding rate is a periodic payment exchanged between long and short traders. Its purpose is to keep the perpetual futures price close to the spot (actual) price of the underlying asset.

How it works:

• When the perpetual price is above the spot price, the funding rate is positive. Long traders pay short traders.
• When the perpetual price is below the spot price, the funding rate is negative. Short traders pay long traders.

Funding payments typically occur every 8 hours, though some exchanges use different intervals. The rate is usually small (e.g., 0.01% per period), but it can spike during extreme market conditions.

Why it matters for grid bots: If you run a long grid bot and the funding rate is consistently positive, you are paying a small fee every 8 hours on your open positions. Over time, this can eat into your profits. Monitoring funding rates is an important part of grid bot management.

What is Mark Price?

On perpetual futures exchanges, you will encounter two prices:

• Last price: The price of the most recent trade executed on the exchange.
• Mark price: A calculated fair price that factors in the spot price and a moving average of the basis (difference between futures and spot price).

Mark price is critically important because it is used to calculate liquidations, not the last price. This prevents market manipulation where someone could artificially spike the last price to trigger liquidations.

When a grid bot checks the current market price to decide whether to place orders, it typically uses the mark price for accuracy and safety.

Key Features of Perpetual Futures

• No expiry: Hold positions as long as you want.
• Leverage: Trade with borrowed capital (e.g., 2x, 5x, 10x).
• Long and short: Profit from both rising and falling markets.
• Funding rate: Periodic payments that anchor the contract to the spot price.
• Mark price: Fair price used for liquidation calculations.

Perpetual Futures and Grid Trading

Grid bots are particularly well-suited for perpetual futures because the no-expiry feature means the bot can run continuously. The bot places limit buy orders at lower grid levels and take-profit sell orders at higher levels, capturing profits from each price oscillation. There is no concern about contract rollovers or settlement dates disrupting the strategy.

Summary

• Perpetual futures are crypto derivatives with no expiration date, allowing indefinite position holding.
• The funding rate is a periodic payment between longs and shorts that keeps the contract price aligned with the spot price.
• Mark price is the fair price used for liquidation calculations, protecting traders from price manipulation.

Next Step

Now that you understand perpetual futures, let us explore the most fundamental position type: What is a Long Position?