Most crypto futures traders today open positions on a contract that never expires. That is a little odd, because futures were invented to be settled on a fixed date. Understanding how the perpetual swap came about, and why it needs a funding mechanism, explains a lot about how these markets behave and where the risks hide.
The problem with expiring futures
A traditional futures contract is an agreement to buy or sell an asset at a set price on a set date. As that date approaches, the futures price is pulled toward the spot price, because at expiry the contract settles against it. Anyone who spots a gap can trade against it, and that pressure keeps the two prices tied together.
For a young crypto market this design had practical drawbacks. Traders had to choose between several expiry dates, liquidity was split across them, and holding a position for longer meant closing and reopening it (rolling) before each expiry. A contract that simply stayed open would be much simpler to use.
The 2016 idea: a futures contract with no expiry
The idea of a futures contract without a settlement date had been discussed in the economics literature long before crypto existed, but it never became a mainstream product. It was BitMEX, a crypto derivatives exchange, that popularised it. Its perpetual bitcoin contract, quoted in US dollars, launched in 2016 and became the model that other venues later copied.
Two features made it stand out. It offered high leverage, at one point up to 100x on its flagship contract, and it was margined and settled in bitcoin rather than in dollars, so profit and loss were paid in the coin itself. Later, many exchanges added contracts margined in stablecoins such as USDT and USDC, which is the version most retail traders see today. Perpetual contracts have since become one of the most heavily traded instruments in crypto.
Funding: the tether to spot
Removing the expiry also removed the force that pulled the futures price back to spot. The perpetual needed a substitute, and that substitute is the funding payment. At regular intervals (every eight hours on many exchanges, though schedules differ) traders on one side of the market pay traders on the other side.
- When the perpetual trades above the spot-based index price, the funding rate is positive and long positions pay short positions.
- When it trades below, the rate is negative and short positions pay long positions.
- In the standard design the payment goes between traders, not to the exchange.
The logic is about incentives. If the perpetual runs rich, holding a long becomes costly and holding a short becomes paid, which encourages selling the contract and pushes its price back down. The mirror image applies when it trades cheap. The rate is typically built from a small interest component and a premium component that reflects how far the perpetual sits from the index. The index itself is usually an average of spot prices from several markets.
It is a nudge, not a guarantee. In fast, stressed markets a perpetual can trade well away from spot for a while.
What this means for your risk
- Funding accrues on position size, not on margin. As a hypothetical example, a rate of 0.01% per eight hours is 0.03% per day on the whole position. At 10x leverage that is about 0.3% of your margin per day.
- The chart price is not always the price that matters. Many exchanges base unrealised P&L and liquidation on a mark price derived from the index, so a brief spike in the last traded price does not necessarily match what your liquidation depends on.
- Funding describes positioning, not the future. A high positive rate tells you that longs are paying to hold their positions. It does not tell you which way price will move next.
Leveraged trading carries a high risk of loss, and funding is one more cost that works against a position held for a long time.
BitMe is a web app that monitors your futures positions on Bybit, OKX and BloFin around the clock and sends Telegram alerts, including for liquidation risk, and it keeps an automatic trade journal from closed USDT/USDC futures trades. It connects with a read-only API key and is free during the beta. You can find more explanations of how futures work in the BitMe guides.