What is a perpetual swap?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 5 min
In short
A perpetual swap is a futures contract with no expiry date. Instead of settlement pulling its price to spot, a funding rate does that job continuously. Positions are margined and can be leveraged, which also means an adverse move burns through margin quickly and ends in forced closure.
Key points
- A futures contract that never expires
- A funding rate keeps its price near spot
- Positions are sized as a multiple of posted margin
- An adverse move ends in forced closure and lost margin
Definition
A futures-style derivative with no expiry, in which periodic funding payments between long and short holders keep its price aligned with spot. Positions are held against margin and settled in cash.
An ordinary futures contract converges to spot as expiry approaches. A perpetual has no expiry to do that, so it uses funding instead: when the perpetual trades above spot, longs pay shorts; when it trades below, shorts pay longs. Traders avoiding the payment take the opposite side, which narrows the gap.
Trading is margined. You post a fraction of the notional, so the position can be many times the capital committed. The higher the multiple, the less price movement it takes for unrealised losses to consume the margin: at 10x, roughly a 10% adverse move wipes it out arithmetically, and maintenance margin and fees force closure before that.
Nothing is delivered; only the difference is settled, which is how a short position is possible without owning the asset. In fast markets, though, the order book thins and forced closures execute far from the last quoted price. Cascades of these liquidations moving the market sharply within minutes are a recurring feature, not an anomaly.
Watch out for
- · Leveraged positions can be wiped out by a small adverse move
- · In fast markets the book thins and forced closures fill far worse than the quoted price
- · Persistent funding payments erode a position's P&L even when the price goes nowhere