If you’ve been poking around the trading world, chances are you’ve come across perpetual futures contracts. They’re everywhere on crypto exchanges and are often pitched as a way to crank up profits with 200x leverage without actually owning the asset. But if you’re new to these contracts, things can get confusing fast — especially when words like funding rates, liquidation, and leverage start flying around.
In this guide, I’ll break down what perpetual futures contracts are, how they work, and show some simple examples that’ll make things click. Whether you’re curious about boosting your returns or just want to avoid getting wiped out by a margin call, this article will give you the basics without the fluff.
If you’re thinking about giving perpetual futures trading a try, check out our full breakdown of
perpetual contract trading platforms — it covers the key differences, features, and what to keep in mind before jumping in.
Key takeaways
- Perpetual futures contracts are crypto derivatives with no expiry date, letting you speculate on price movements without owning the asset.
- Leverage allows you to open larger positions with less capital, but it also increases your risk of liquidation if the trade moves against you.
- Funding rates are periodic payments between traders that help keep the contract price close to the spot market — you might pay them or receive them.
- Beginner mistakes often include using too much leverage, not understanding margin requirements, and underestimating how quickly losses can add up.
What are perpetual futures contracts?
Perpetual futures contracts are a popular type of crypto derivative that allows traders to speculate on the price of an asset without owning it and without any expiration date. Unlike traditional futures, perpetual contracts don’t settle on a specific date, which means traders can hold positions indefinitely — as long as they manage their margin and avoid liquidation.
That’s what makes them different from regular futures contracts — you can hold your position as long as you like, assuming you don’t get liquidated first. This flexibility is one of the main reasons why perpetual futures have become so widely used on crypto trading platforms.
The idea is pretty simple. You pick whether you think the price of something like Bitcoin will go up or down. If you’re right, you make money. If you’re wrong, you lose. Sounds straightforward, but there’s more to it once you add things like leverage and funding rates.
Most platforms let you trade these contracts with leverage, which means you can control a much bigger position with a smaller amount of money. That also means your profits (and your losses) get amplified. And since these contracts don’t expire, they rely on something called a funding rate to keep the price of the contract in line with the spot market.
If that sounds a bit technical, don’t worry — we’ll break it all down step by step. But for now, just think of perpetual futures as a way to bet on crypto prices without needing to actually buy the coins.
How do perpetual futures work? (with simple example)
The way perpetual futures work is actually pretty straightforward once you get the hang of it. You’re basically betting on whether the price of something, like Bitcoin, is going to go up or down. You’re not buying the actual coin, just trading on the price movement.
Here’s an example.
Let’s say Bitcoin is sitting at $80,000 and you think it’ll go higher. You open a long position using 10x leverage with $1,000. That gives you control over a $10,000 trade. If the price goes up by 5% to $84,000, you’re not just making 5% — you’re making 50% because of the leverage. That’s a $500 profit.
(If you want to quickly test out different position sizes, leverage levels, or price targets, try using our crypto futures calculator — it makes it easier to run the numbers before placing a trade.)
But it cuts both ways. If the price drops 5% to $76,000, you’re down 50%, which means your $1,000 is now $500. Keep dropping, and you could hit your liquidation price — that’s when the exchange steps in and closes your trade to stop further losses.
There’s also this thing called the funding rate, which is just a small fee that traders pay each other to keep the contract close to the spot price. Sometimes you pay it, sometimes you earn it. We’ll get into that next.
If you’re still new to this type of trading, we’ve put together a separate guide that covers the basics of crypto contract trading in more detail — including the differences between perpetuals, futures, and options.
Key terms: leverage, liquidation, funding rate
Before going any further, it’s worth getting familiar with a few key terms you’ll run into all the time when trading perpetual futures. These are the ones that tend to trip people up in the beginning, so let’s break them down in plain English.
Leverage
Leverage is probably the first one you’ll hear about. It just means borrowing money to open a bigger trade than you could with your own cash, something we discuss a lot on leverage.trading. So, if you’re using 10x leverage, your $1,000 gives you control over a $10,000 position. It can boost your profits, but it also increases your risk. A small price move in the wrong direction can wipe you out pretty quickly. Take your time to learn more about how leverage can increase your losses and why it’s important to keep risk under control.
Liquidation
Liquidation is what happens when your trade moves too far against you and you don’t have enough margin left to cover the loss. Before that happens, you’ll usually get a margin call, which is basically a warning that you need to top up your account or risk losing the position.
If the price keeps moving against you, the exchange will automatically close your position to stop you from going into the negative. It’s basically a forced exit — and it happens more often than you’d think, especially when traders get greedy with leverage. If you’re unsure how much margin you need to avoid this, check out our guide on margin requirements.
Funding rate
Then there’s the funding rate. This one’s a bit weird at first. Since perpetual contracts don’t expire, exchanges use funding rates to keep the price of the contract close to the spot price. Depending on which side of the trade you’re on (long or short), you’ll either pay a small fee or receive one. It changes every few hours and is set by the market, not the platform.
Calculate Funding Rate
Total Funding Fee
Daily Funding Fee
information: The number of funding intervals refers to how often the funding fee is charged. Most exchanges charge funding every 8 hours, which means 3 intervals per day. So if you’re holding a position for 2 days, you’d enter 6 intervals.
Once you’ve got a handle on these three, everything else starts to make a lot more sense.
Pros and cons of perpetual contracts
Like most trading tools, perpetual contracts have their upsides and downsides. Here’s a quick breakdown of the main pros and cons to keep in mind.
Pros:
- You can trade with leverage - This lets you control a much larger position than your actual balance. Even small price moves can lead to solid profits if you’re on the right side of the trade. For example, with 1:100 leverage, a tiny market shift can have a big impact. You can read more about what 1:100 leverage actually means and how it works in practice.
- No expiry date - Unlike traditional futures, there’s no set end date. You can hold your position for as long as you want — as long as you don’t get liquidated first.
- You can go long or short - This gives you the chance to make money whether the market is going up or down. You’re not limited to bullish moves.
- Accessible 24/7 on crypto exchanges - Unlike traditional markets, you can trade crypto perps anytime — nights, weekends, holidays, whenever.
Cons:
- Losses are amplified with leverage - Just like profits, losses get bigger too. One wrong move with high leverage and your position can get wiped out fast.
- You have to deal with funding rates - If you hold a position for a while, these small recurring fees can eat into your gains — especially during volatile markets.
- You risk liquidation if margin runs out - If the trade goes against you and your margin gets too low, the exchange will automatically close your position. It can happen quickly if you’re not watching your trade.
- Complex for beginners - If you don’t fully understand how leverage, margin, and funding work, it’s easy to make costly mistakes.
- Not ideal for long-term holding - Because of funding rates and liquidation risk, perps aren't really designed for holding positions over weeks or months.
Why beginners use perpetual futures in crypto trading
The big returns
For better or worse, a lot of beginners get drawn to perpetual futures pretty early on in their trading journey. And honestly, it’s not hard to see why. The idea of turning a small deposit into a big gain with just a few clicks is tempting — especially when exchanges are offering 50x leverage or even 200x leverage right out of the gate.
One reason is accessibility
Most crypto platforms put perpetual contracts front and center. They’re easy to find, easy to open, and often come with flashy interfaces that make them look more beginner-friendly than they really are. There’s no KYC on some exchanges, no expiry dates to think about, and you can start trading with a small amount of capital.
Then there’s the market itself
Crypto is known for big price swings, and that volatility makes leverage seem even more appealing. A 2% move on Bitcoin might not sound like much in spot trading, but with 25x leverage, that’s a 50% swing on your position — and that kind of movement gets attention fast.
But here’s the catch.
Just because it’s easy to open a leveraged position doesn’t mean it’s easy to manage one. Most beginners jump in without fully understanding funding rates, liquidation risk, or even how margin works. That’s why it’s so common to see new traders get liquidated within their first few trades.
Still, for those who take the time to learn how it works, perpetual futures can be a useful tool — even at low leverage — especially for short-term leverage trading strategies or hedging existing positions. The key is not getting sucked in by the hype before you know proper risk management.
5 most common mistakes among beginners
If you’re new to perpetual futures, it’s totally normal to make a few mistakes along the way — pretty much everyone does. But some slip-ups are more common (and more painful) than others. Here are five beginner mistakes that come up again and again.
1. Using way too much leverage
This is probably the biggest one. Just because an exchange offers 100x or 200x leverage doesn’t mean you should use it. Even small price movements can completely wipe out your position at that level. A lot of new traders learn this the hard way — often on their very first trade. Take a look at our beginner guide on how to choose leverage as a beginner.
2. Not knowing how liquidation works
Many beginners think they can “ride it out” if the price goes against them. But with leverage, there’s a liquidation price that forces the trade to close if your margin gets too low. If you’re not paying attention to that number, you’re trading blind.
3. Ignoring the funding rate
Funding fees might seem small, but they can add up — especially if you’re holding a position for days or weeks. A lot of new traders get surprised when they see profits eaten up by funding charges they didn’t realize they’d have to pay.
4. Not understanding margin requirements
A lot of beginners think their whole balance is fair game, but only a portion of it actually counts as margin. If you don’t know how margin requirements work, it’s easy to overextend and get liquidated faster than expected. I've written an entire guide explaining how margin requirements work where I explain the difference between isolated margin vs cross margin.
5. Ignoring trading fees
Between opening, closing, and funding fees, costs can pile up — especially for short-term trades. Beginners often overlook this and wonder why their profits are smaller than expected. Keep in mind that fees scale up with your leverage. If you use 30x leverage, your fees increase 30 times as well.
Final words
Perpetual futures contracts can look pretty exciting from the outside — and to be fair, they can be. The flexibility, the leverage, the potential for fast gains… it’s no surprise they’ve become so popular in crypto trading. But they’re also one of the easiest ways for beginners to blow up an account if you’re not careful.
If you’ve made it this far, you’ve already done more research than most first-time traders. And that’s a good thing. The more you understand how things like margin, liquidation, and funding rates work, the better your chances of actually surviving those early trades — and maybe even turning a profit.
Start small, keep your leverage low, and don’t rush into positions just because you saw someone post their gains on Twitter. Learn how to protect your downside first — the upside will take care of itself.
Good luck, and trade smart.
