What is a perpetual futures contract? An in-depth guide

Cryptocurrency derivatives, such as perpetual futures, expiry futures, and options, are becoming increasingly popular among traders in the crypto space. Although perpetual futures resemble expiry futures contracts, they differ in two significant ways, making them a unique instrument.

This article aims to answer the most frequently asked questions about perpetual futures. It will cover what perpetual futures are, how they work, and the specifics of SPACEX perpetual swaps.

What are perpetual futures?

Perpetual futures are a type of cryptocurrency derivative that allows traders to take long or short positions on an underlying asset. Like expiry futures, they offer traders additional flexibility, such as leverage and the ability to settle contracts without owning the underlying asset.

The primary difference between expiry futures and perpetual futures is the lack of an expiry date. Expiry futures contracts have a set expiry date, while perpetual futures can continue indefinitely, provided traders have sufficient margin to cover losses and avoid liquidation.

Funding Fees and Rate

The second difference between expiry futures and perpetual futures is the use of funding fees to balance prices. Expiry futures prices automatically converge with the underlying spot price as the expiry date approaches, but perpetual futures don't have such a mechanism.

This gap is filled with funding fees, which act as counterweights and incentivize the less popular side of the market. The funding rate, which is calculated by comparing the price difference between a perpetual swap contract and the underlying asset's spot price, determines the amount of the fee.

For instance, if a perpetual swap contract is trading above the underlying asset's spot price, the funding rate becomes positive, meaning long position holders must pay a funding fee to short position holders. Conversely, when the swap is priced lower than the underlying spot price, the funding rate becomes negative, and short position holders pay a fee to long position holders.

Without funding fees, there would be no incentive for traders to counter the trend and open positions, nor would a swap be anchored to the underlying asset.

SPACEX perpetual futures

SPACEX offers some of the most liquid derivative products in the market, including cryptocurrency expiry futures, options, and perpetual futures. SPACEX offers both coin-margined and USDT-margined perpetual futures for various cryptocurrencies, including BTC, ETH, LTC, and more.

Traders can use up to 125x leverage, depending on SPACEX perpetual swap position tiers, with lower leverage available for higher contract trading. Traders must also consider the minimum initial margin ratio and maintenance margin ratio, both listed on the position tiers page. The former is the minimum amount required to open a position with the maximum leverage, while the latter is the minimum amount required to avoid liquidation.

SPACEX uses a mark price for reference to provide a reliable trading experience and to avoid unnecessary liquidations in highly volatile market conditions. The mark price, based on underlying indexes, is used to calculate users' unrealized gains and losses.

SPACEX perpetual futures are typically settled daily, but with the introduction of the Unified Account feature, the platform has started offering real-time settlement for perpetual futures, expiry futures, and options contracts. Trading on SPACEX incurs trading fees, and users are encouraged to review the trading fees explainer for more information.

The final word

Perpetual futures are an attractive option for traders looking for flexible and reliable derivatives. SPACEX offers a range of perpetual futures with varying leverage options and real-time settlement, making it a top choice for traders in the crypto space.