guide
What Are Perpetual Contracts? A Complete Guide
Learn what perpetual contracts are, how funding rates work, leverage mechanics, and liquidation risks. A complete beginner's guide to perps.
What Are Perpetual Contracts?
A perpetual contract is a derivative with no scheduled expiry. It gives long or short exposure to a reference asset under the contract rules. Funding payments help align its price with a reference market; they do not guarantee that the prices stay equal. Positions remain subject to maintenance requirements, trading interruptions, delisting and any exceptional settlement rules.
A cash-settled perpetual position does not itself give ownership or delivery of the referenced coin. The asset used as collateral is a separate question. Linear and inverse contracts can use different quantity conventions, profit-and-loss formulas and settlement currencies. Read the specifications for the exact instrument and account.
Risk Warning Perpetual contracts can cause substantial losses. Collateral additions, fees and account obligations can change the amount at risk. This guide is educational and does not establish that a product, leverage level or risk percentage is suitable for you.
How Perpetual Contracts Work
Position quantity, margin and leverage are related but different. Margin supports exposure; the leverage setting alone does not describe every account risk or fix the liquidation threshold.
Identify the margin account
Check which assets qualify as collateral, their valuation adjustments, the margin mode and any borrowing obligations. Cross margin can share eligible collateral within an account; isolated margin assigns collateral to a position but can still receive additions.
Read the contract quantity
Confirm whether order quantity represents base-asset units, contract counts or another denomination. A minimum order or quantity increment is not automatically the size of one contract. Limits and permitted leverage can change with the instrument, position size and account.
Calculate the exposure
For a simple linear contract quoted in base units, notional equals quantity multiplied by the valuation price. Initial margin requirements depend on the leverage and risk rules; existing positions, fees and extra collateral can change the actual amount committed. Inverse contracts require their own formula.
Account for funding and fees
Read the current funding rate, its time basis and the charging method. Some contracts use settlement timestamps; others accrue funding throughout the holding period. Trading fees and possible borrowing, conversion or settlement charges are separate costs.
Monitor maintenance and exit conditions
An order to close depends on market liquidity, order conditions and platform availability. If the account or position reaches the venue’s maintenance trigger, the venue can reduce or close exposure according to its procedures. Neither the displayed liquidation estimate nor a stop order guarantees an execution price.
Funding Payments Explained
Funding transfers depend on the contract and can be positive, negative or zero. The sign describes the payment direction; it does not establish traders’ motives or predict the next price move.
Hypothetical single-settlement example: a linear position has a value of 10,000 settlement-currency units and a funding rate of 0.01% per 8 hours. The transfer amount is 1 in the same units. A positive rate makes the long pay and the matching short receive under this convention. The actual venue may value or accrue the transfer differently.
Positive funding
Under the usual long-to-short convention, a positive rate means long positions pay short positions. A quoted rate must be read with its interval, accrual method and position valuation. It is not a guaranteed income stream for the receiving side.
Negative funding
Under the same convention, a negative rate means short positions pay long positions. Rates can change or reverse. Price losses, fees and changes in collateral can exceed funding received; the sign alone is not a trading signal.
Funding Rate Details
| Detail | Meaning |
|---|---|
| Timing | Use the exact contract schedule and accrual rules; one venue’s timestamp convention does not apply to every perpetual. |
| Rate | Rates and limits vary by instrument and can change. There is no universal typical range or fixed direction. |
| Annualized example | An unchanged 0.01% every 8 hours gives 10.95% over 365 days by simple addition. This excludes compounding, fees and position-value changes and is not a forecast. |
| Payment basis | Use the venue’s position-value formula and settlement denomination, not the posted margin alone. Continuous accrual also depends on time held. |
Leverage and Margin
Isolated margin Assigned collateral
Margin is assigned to a position under the account rules. Initial allocation is not a universal loss cap: manual or automatic additions, fees and other obligations can change the amount at risk. Check replenishment settings and applicable contractual protections.
Cross margin Shared eligible collateral
Eligible collateral is shared within the relevant margin account. Losses, funding and changes in collateral valuation can affect other positions in that scope. This does not necessarily include every wallet or balance held with the provider.
Lower leverage Risk remains
For otherwise identical exposure and rules, more supporting equity can increase the buffer to maintenance. A fixed leverage range is not universally safe or suitable, and reducing the leverage setting is not the same as reducing the position’s notional exposure.
Higher leverage Less margin buffer
For otherwise identical exposure and rules, a smaller initial margin leaves less room for losses and costs before maintenance is reached. Permitted leverage depends on current product and account limits; expertise does not remove liquidation or execution risk.
Maintenance and Liquidation
Equity and requirements change
Adverse prices, falling collateral values, funding, fees and other account exposures can reduce the maintenance buffer. A displayed liquidation estimate can change even without a matching move in the last-traded price.
Maintenance conditions are reached
The trigger follows the venue’s position or account maintenance rules and pricing inputs. It can occur before equity reaches zero. Risk tiers, collateral adjustments and eligible offsets mean one fixed maintenance percentage is not universal.
The venue reduces risk
Depending on its rules, the venue may cancel orders, reduce positions in stages, take over exposure or close it. A liquidation trigger does not guarantee an immediate full fill at the displayed price; any fees or remaining balances depend on the procedure.
Shortfall rules apply
Insurance funds, loss-allocation mechanisms or automatic deleveraging operate under specific venue rules. They are not a blanket promise to reimburse a trader’s margin or remove every possible obligation. Read the applicable account and contract protections.
Perpetual vs Dated Contracts
| Feature | Perpetual contract | Dated contract |
|---|---|---|
| Expiry | No scheduled expiry; halts, delisting and exceptional settlement rules still apply. | A specified maturity date, with settlement or delivery under the contract rules. |
| Price reference | Funding incentives can help align price with a reference market, without guaranteeing equality. | The settlement reference and observation window are specified for the instrument. |
| Holding costs | Funding may be paid or received; fees and other account costs can also apply. | A perpetual-style funding transfer is generally absent, but trading, settlement or financing costs can remain. |
| Premium or discount | The contract can trade away from the reference price. | The contract can trade at a premium or discount before maturity. |
| Liquidity | Depends on the instrument, venue, order size and market conditions. | Depends on the instrument, maturity, venue, order size and market conditions. |
| Planning considerations | Funding changes, maintenance and the ability to close must be considered. | Expiry, settlement methodology and any cost of rolling exposure must be considered. |
Checks Before Trading
Check the exact instrument, quantity units, settlement currency and current account eligibility.
Identify eligible collateral, margin scope, replenishment settings and maintenance tiers.
Distinguish a stop trigger from a guaranteed fill; consider liquidity, gaps and platform interruptions.
Measure notional exposure and possible costs instead of relying on the leverage setting alone.
Read the current funding interval and whether charges accrue between settlements; separate simple annualization from a forecast.
Treat published open interest and liquidation records as scoped observations, not proof of motives, outstanding orders or future price moves.
No fixed leverage or account-risk percentage guarantees safety. A cash-settled perpetual position does not itself confer ownership of the referenced asset.
Frequently Asked Questions
What is a perpetual contract?
How do funding payments work?
Can liquidation happen before my margin is exhausted?
How do perpetual and quarterly contracts differ?
Does every cryptocurrency have a perpetual market?
How much leverage is available?
Do I own the referenced coin?
Is there one funding-rate formula?
Is funding charged only at a settlement timestamp?
How do isolated and cross margin differ?
How should funding-rate extremes be compared?
Why can liquidation differ from the price shown earlier?
Can I access perpetual contracts where I live?
Derivatives & Leveraged Products — Important Risk Warning
Derivatives and leveraged products are complex and carry a high risk of rapid, substantial losses. Depending on the product and account rules, losses can exceed the initial margin or money committed. A stand-alone purchased option can lose its entire premium plus transaction costs; writing options, exercising into another position, or combining positions can create additional obligations. An uncovered call writer can face unlimited loss. Applicable legal protections can affect the loss boundary.
You should carefully consider whether you understand how derivatives work and whether you can afford to take the high risk of losing your money. This content is for educational purposes only and does not constitute financial advice, investment advice, or a recommendation to trade derivatives.
Legal availability and regulatory protections depend on the product, service, provider and jurisdiction. In the EU, check the applicable investment-services rules, including MiFID II where relevant, and any product restrictions. Before trading, verify with the relevant regulator whether the provider has the permissions required for the service and whether the product may be offered to you. A website being accessible, or a product appearing on this website, does not establish authorization or eligibility.
Continue Learning
Get Started with Kraken
Sign up in minutes and get started with Kraken — a regulated exchange operating since 2011, with deep liquidity and low fees.
Visit KrakenAd · Digital asset prices are subject to high market risk and price volatility. Don't invest unless you're prepared to lose all the money you invest. Terms & risk disclosure
This page contains affiliate links. We may earn a commission if you sign up, at no extra cost to you.