The difference between perpetual contracts and futures contracts

Expiration

Futures contracts are financial derivatives with set expiration dates, requiring traders to settle or roll over their positions when they mature. In contrast, perpetual swaps have no fixed expiration, offering traders exceptional flexibility in managing their investments.

This flexibility allows buyers and sellers to keep positions open for extended periods without worrying about reopening positions or paying renewal fees. To maintain an open position, accounts must have enough margin to cover potential losses and prevent forced liquidation.

Because of this, perpetual swaps are a preferred choice for traders who want to implement long-term strategies or take advantage of market moves without time constraints. For example, a trader anticipating a gradual price increase in an asset can hold a long position for weeks or months, provided their account remains sufficiently funded.

Funding Fees

Funding fees are a distinctive mechanism that sets perpetual swaps apart from traditional futures contracts. These fees are designed to keep the perpetual contract price aligned with the spot market and prevent large discrepancies that could distort market pricing.

It’s important to note the funding rate isn’t a platform or exchange fee—it’s a payment exchanged between contract participants, specifically between long position holders (buyers) and short position holders (sellers). The funding rate is calculated based on the difference between the perpetual contract price and the spot market price.

If the perpetual contract price exceeds the spot price, the funding rate is positive—long position holders pay short position holders. When the contract price falls below the spot price, the funding rate turns negative, and short position holders pay long position holders.

This mechanism provides an economic incentive for traders to rebalance the market. For example, if excessive demand for long positions pushes the contract price above the spot price, positive funding fees incentivize some traders to close long positions or open shorts to earn the fee, gradually restoring price equilibrium.

Funding fees are usually calculated and settled at regular intervals, such as every 8 hours, so traders must monitor funding rates closely when planning long-term investment strategies.

FAQ

Perpetual Contracts vs. Futures Contracts: What Are the Key Differences?

Perpetual contracts have no expiration and track the spot price using funding mechanisms, while futures contracts have a fixed settlement date. Perpetual contracts offer higher leverage; futures contracts offer less flexibility but more predictable pricing.

What Are Perpetual Contracts and How Do They Differ from Traditional Futures Contracts?

Perpetual contracts don’t expire, while futures contracts have a set maturity date. Perpetuals use a funding mechanism to keep the price near the spot price, enabling continuous trading without interruption.

Are perpetual contracts safer than futures contracts? What are the potential risks?

Perpetual and futures contracts are similar in terms of safety. The main risks include forced liquidation during price swings, funding risks in perpetual contracts, and slippage. Choose based on your trading strategy.

What Are Funding Fees (Funding Rates) in Perpetual Contracts and How Do They Affect Profits and Losses?

Funding fees are periodic settlements between traders that keep the contract price near the spot market. When fees are positive, traders with long positions pay those with short positions, reducing profits or increasing losses; the reverse is true with negative fees. They directly impact a trade’s final return.

When Should You Use Futures Contracts and When Should You Use Perpetual Contracts?

Use futures contracts to hedge price volatility over specific periods. Use perpetual contracts for long-term positions with no expiration, lower funding fees, and high liquidity.

Can Perpetual Contracts Be Held Indefinitely? How Do They Differ from Futures Contracts with Expiration Dates?

Yes, perpetual contracts can be held indefinitely, while futures contracts have a set expiration date. Perpetuals track the spot price via periodic funding; futures contracts lock in the price at the time of agreement.