Futures, perpetuals and the funding rate

Derivatives are contracts whose value is derived from an underlying asset rather than the asset itself. In crypto, the dominant derivatives are futures and, especially, perpetual futures.

Futures

A futures contract is an agreement to buy or sell an asset at a set price on a future date. It lets traders speculate on price direction, or hedge, without holding the underlying coin. Traditional futures have an expiry date on which they settle.

Perpetual futures ("perps")

A perpetual is a futures contract with no expiry — you can hold it indefinitely. Perps dominate crypto trading volume because they are simple to hold and offer high leverage. But with no expiry to anchor them to the spot price, they need another mechanism to stay close to it.

The funding rate

That mechanism is the funding rate — a small periodic payment exchanged between traders (not paid to the exchange):

• When the perpetual trades above spot (more buyers/longs), longs pay shorts. This discourages longs and nudges the price down toward spot.
• When it trades below spot, shorts pay longs, nudging the price up.

The funding rate keeps the perpetual tethered to the real price. It is also a cost or income you must account for: holding a heavily one-sided position can mean paying funding repeatedly, quietly eroding returns.

Why this sits at the high-risk end

Perpetuals combine leverage, liquidation, and funding costs in a single product, on top of crypto's underlying volatility. They are powerful tools for experienced traders and a fast route to large losses for everyone else. Understand every one of these mechanics before considering them — and recognise that "understanding" the product does not remove its danger.