What Are Perpetual Futures? A Complete Beginner's Guide

What are perpetual futures? A handbook for beginners

Perpetual futures, often called “perps”, are a way for you to trade on the price of an asset without buying it. The derivative contracts in perpetuals don’t have an expiry date, which means they can be held indefinitely. In addition to being an increasingly popular financial instrument in the crypto ecosystem, perps can also be applied to indices and commodities, and this makes their application more diverse.

There are two things that set perpetual futures apart from traditional crypto trading. First, they let you use leverage, which basically means that you can borrow to control a larger position than your collateral alone would allow. This, of course, increases your potential profits as well as your potential losses. The second thing that sets them apart is their lack of an expiration date. In essence, your positions can remain open for as long as there’s enough collateral behind them.

Now, the best way we believe you can fully capture the concept of perpetual futures is by showing you a concrete example. Fortunately, we found a perfect one using Kalshi perpetual futures, which we’ve dissected below.

Perpetual futures example

So let’s say that Bitcoin (BTC) is currently trading at $100,000 on the spot market and you believe the price will rise further. What you can do is open a long position on a BTC perp at $100,000, but using $10,000 worth of collateral and 2x leverage. This will then consequently give you $20,000 worth of exposure.

Now, over the next month, let’s again say that Bitcoin rises to $110,000. Given the 10% increase, your $20,000 position will now be worth $22,000, which indicates a $2,000 profit on your $10,000 collateral. If you had initially straight-up purchased $10,000 worth of Bitcoin on the spot market, your gain would have been just $1,000. So essentially, the leverage that was included amplified your profit.

However, leverage cuts both ways and can also impact your losses. If, for instance, BTC had dropped to $90,000 instead, your initial $20,000 position would be worth $18,000. So you’ve essentially lost $2,000 on the $10,000 collateral. Assuming the price of Bitcoin falls far enough to wipe out your collateral, then your position will be liquidated.

It’s important to remember that you can hold perpetual futures for as long as you want. It could be for a month or even a whole year, and this is because there’s no expiry date that forces you to close. The only ongoing cost in this arrangement is called the “funding rate”.

How funding rates affect perpetual futures

Before going ahead to open positions on perps at the best perpetual futures prediction market sites, it’s crucial you understand what a funding rate is. In the most simple terms, the funding rate is a mechanism that keeps the price of a perpetual futures contract close to the spot price of the asset (e.g., Bitcoin). It’s a small periodic payment that’s exchanged between buyers (longs) and sellers (shorts) of a contract.

Depending on the market conditions, funding rates can be either positive or negative. Whenever it’s positive, it means the contract price is higher than the asset’s spot price, and in which case, the longs pay the shorts the funding amount. If it’s negative, it means the contract price is lower than the spot price, so the shorts pay the longs the funding amount.

On most prediction market sites, funding rates are applied every 8 hours, but some platforms may have different intervals. It’s also important to note that the funding rate on perpetual futures isn’t charged by the platform but by traders themselves. However, the exact formula that’s used to calculate it will often vary and depend on the specific site you’re using.

Funding rate example

To explain the funding rate better, we’ll use another example. Let’s say that a BTC perp is trading at $101,000, but Bitcoin’s actual spot price is $100,000. The perpetual futures on this asset are overpriced, and that’s because too many traders are going long and pushing the contract price up. To rectify this, contract buyers will pay a small fee to sellers every 8 hours.

When buyers have to pay for holding every 8 hours, it makes the long position slightly more expensive. This will then discourage it and bring the price back down toward $100,000. It works the same way in reverse, such that if the perp is trading below spot price, sellers pay a fee to buyers. This makes the short position more expensive to maintain, which then encourages buying and pushes the price back up.

Perpetual futures trading: The three important decisions to make

Regardless of the prediction market platform you’ve chosen, opening a perp trade will involve three main decisions. These are:

• Choosing your direction (long or short) – If you think the price of an asset will rise, you should open a long position. Alternatively, if you think the price will fall, then you should open a short position. Either way, the goal is to make a profit if the outcome (price increase or price drop) happens.
• Choosing your collateral and leverage – To open a position, you must deposit collateral, which is the money that backs your trade. On the other hand, the leverage determines how much exposure your collateral will control. Remember that a higher leverage indicates more potential gains as well as more potential losses from the same price move.
• Managing your risk – There are two order types you can use to help manage the outcome of your trades. One is the “stop loss”, which automatically closes your position if an asset price moves too far against you. The other is the “take profit”, and this automatically closes your position whenever prices hit your target. With the former, you’ll be limiting your losses, while the latter helps you lock in profits.

How to start trading perpetual futures

Similar to what’s in a Sleeper Markets review, we’ll walk you through the basics of getting started using very simple steps. This time, however, our focus will be on what you need to do to trade perpetual futures. So here goes:

1. Launch your preferred prediction market brand on your PC or mobile browser.

2. Open a new account by providing all personal information that’s requested. This often includes your full name, email address, date of birth, mobile number, and residential address.

3. Verify your account by uploading a government-issued ID, such as your passport or driver’s license. Also, ensure that completing the KYC verification steps at the platform will give you access to the perpetual futures trading section.

4. Make a deposit using any of the available payment options on the website. There may be a separate balance for perpetual futures, so you must pay attention to this.

5. Now, go to the section where perpetual futures are listed to explore the supported assets and choose one to trade on.

6. Next, click the “Long” or “Short” button to select whether you think the asset’s price will rise or fall.

7. Enter the amount you want to spend on collateral and set your leverage.

8. Complete the trade and wait for the outcome.

How are perpetual futures different from prediction markets?

So, what’s the difference between perpetual futures vs prediction markets? Perpetual futures and prediction markets are different products built for different purposes. Unlike perps, prediction markets have a specific end date when predictions resolve. There’s also the matter of leverage, which is only applicable to perpetual futures. This means you can open larger positions with less investment to potentially trigger bigger profits or losses.

With prediction markets, you’re simply purchasing contracts at a price and can’t lose more than was paid initially. We’ve put together a table below showing you a clearer snapshot that satisfies the question.

Our top 3 strategies for trading perpetual futures

Becoming a high-level trader of perpetual futures may seem like a longshot for many people. However, once you’ve gotten the hang of it, it’s actually a pretty straightforward concept. So whether you’re just starting or you’re looking to improve your perp trades, here are a few tips to keep in mind:

Pros and cons of perpetual futures

Pros and Cons

• No expiration dates
• Possible higher returns with less investment
• Easy-to-use control tools

• Potentially large losses are possible

Our final verdict on trading perps

With perpetual futures, you can speculate asset prices without worrying about expiry dates. While this gives you more time to hold positions and earn bigger profits, there’s an equally high possibility of massive losses. However, by applying some of our recommended strategies, you can be more prepared for any eventualities. If you’re ready to start trading perpetual futures today, click any of the on-page banners to begin.

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