Perpetual Futures (Perps) Explained and How to Start One

In the fast-moving world of digital assets, traditional financial instruments often feel like relics of a bygone era.

At LegalBison, we navigate the complexities of fintech and crypto consulting daily, and few instruments generate as much inquiry and volume as the Perpetual Future.

Often called “perps,” these contracts have become the lifeblood of the cryptocurrency ecosystem, enabling trading around the clock (24/7) and processing trillions of dollars in volume, dwarfing the spot markets that theoretically underpin them.

The daily trading volume of the overall perpetual futures market is estimated to be around 75-100 billion USD, making them one of the most liquid instruments in crypto.

But what exactly are they?

Why did an academic concept from 1993 become the dominant force in the crypto economy of today?

Perpetual futures have gained significant popularity in the mid-2010s with the rise of crypto markets and are now one of the fastest-growing derivatives in the world.

And for the entrepreneurs looking to build the next Binance or Hyperliquid, how do you navigate the regulatory minefield to offer these products legally?

We have compiled a comprehensive guide to demystifying perpetual futures, exploring their mechanics, their fascinating history, and the strategic roadmap for businesses looking to enter this high-yield arena.

What Are Perpetual Futures?

At its core, a perpetual futures contract is a derivative agreement to buy or sell an asset at an unspecified point in the future.

Trading perpetual futures enables traders to speculate on assets without owning them, offering flexibility and accessibility for various trading strategies.

Perpetual futures work by tracking the spot price of the underlying asset, using funding rates to keep prices aligned, and allowing positions to be held indefinitely without expiration.

Unlike traditional futures contracts, which obligate you to buy corn, oil, or Bitcoin on a specific settlement date like “December 21st”, perpetual futures have no expiration date.

Perpetual futures do not have a set expiration date, allowing traders to hold positions indefinitely as long as they maintain the required margin.

Think of it as the difference between a hotel stay and a rental agreement. A traditional future is like a hotel booking; you have a definite check-out date (expiration) where you must settle your bill and leave.

A perpetual contract is akin to a rental agreement where you can stay in the “house” (hold the position) forever, provided you keep paying the rent (funding fees) and maintain your security deposit (margin).

Because they never settle, perps allow traders to hold leveraged positions indefinitely without the friction of “rolling over” contracts, the process of selling an expiring contract to buy a new one, which creates basic risk and inefficiencies in traditional markets.

Perpetual futures allow traders to use leverage, enabling them to control larger positions with a smaller amount of capital. Perpetual futures are characterized by their availability for high leverage, allowing traders to control larger positions with a smaller amount of capital.

This innovation allows for the concentration of liquidity into a single instrument (e.g., BTC-PERP) rather than fracturing it across monthly or quarterly expiration dates.

Related: Difference Between Spots vs Prop vs Perps

The Mechanism: How Perps Stay Tethered to the Underlying Asset

If a contract never expires, what stops its price from detaching completely from the actual price of the underlying asset (the spot price)?

If Bitcoin is trading at 100,000 USD, why wouldn’t the perp trade at 150,000 USD if market sentiment is irrationally bullish?

In the context of futures markets, the answer lies in the Funding Rate.

The mark price is used to determine the fair value of the contract and is central to the funding rate mechanism, helping to keep the perpetual futures price aligned with the spot price.

Related: Bitcoin vs Ethereum in Business Implementation Perspective

The Funding Rate: The Market’s Thermostat

The funding rate is a periodic payment exchanged directly between long (buy) and short (sell) traders. It acts as a gravitational force, or a thermostat, to pull the perp price back in line with the spot price.

• Positive Funding: When the perpetual contract trades higher than the spot price (indicating bullish sentiment), the funding rate turns positive. In this scenario, traders with a long position pay short traders. This creates an economic incentive to close longs (sell) or open shorts (sell), driving the price down toward the spot.
• Negative Funding: When the perp price trades lower than the spot price (indicating bearish sentiment), the rate turns negative. Here, short traders pay long positions, incentivizing buying pressure to push the price back up.

Meaning traders who engage in these funding rate-driven strategies closely monitor funding payments to optimize their returns.

Market moves, such as sudden price fluctuations, can quickly shift the funding rate, influencing how traders adjust their positions and risk management strategies.

This mechanism typically cycles every eight hours on major exchanges like Binance, effectively forcing the market to self-correct.

We often explain this to our consulting clients as a tax on crowd sentiment; if everyone is betting “up,” the bulls must pay the bears to keep the market equilibrium stable.

Research indicates that this funding mechanism actively shapes market behavior, creating U-shaped volatility patterns within each eight-hour cycle as traders adjust positions to minimize payments.

Also read: Choosing the Right Crypto License, VASP, CASP, or DASP?

Liquidation and Margin

To trade perps, participants use leverage, allowing them to control large positions with a fraction of the capital (margin).

Traders use their own money as margin to open a leveraged position, and price moves can quickly impact the margin balance.

Perpetual futures allow traders to use leverage, enabling them to control larger positions with a smaller amount of capital, but this also increases risk if the market moves against them.

• Cross Margin: Uses the entire balance of the wallet to fund all open positions. This acts as a safety net for individual trades but risks draining the entire wallet if one position goes catastrophically wrong.
• Isolated Margin: Allocates a specific amount of collateral to a single trade. If the trade fails, only that specific amount is lost, protecting the rest of the portfolio.

When a position open experiences losses that exceed the maintenance margin, the exchange’s risk engine triggers a liquidation.

This is a forced closure of the position to ensure the platform remains solvent. To avoid liquidation, it is crucial to maintain proper margin levels and monitor your positions carefully, especially during volatile price moves.

In modern markets, “liquidation bands” often cluster within specific price corridors, creating boundaries policed by the mechanical consequences of forced selling.

Who Sets the Range? The Hidden Governance of Markets

At LegalBison, we analyze markets beyond surface-level price action. A fascinating, often overlooked aspect of perps is how they actively structure market volatility.

Recent research suggests that ranges on a chart are not random; they are governed outcomes shaped by funding mechanics and timeframes.

Specifically, the 4-Hour (4H) timeframe acts as a critical filter where institutional positioning becomes visible.

When funding rates remain high (longs paying shorts) for extended periods without price expansion, the market is effectively “taxing” the bulls. This financial drain forces a compression of price. The market isn’t just “undecided”; it is being constrained by the cost of capital.

Furthermore, liquidation bands, clusters of stop-loss orders and liquidation points, act as “power-policed boundaries”.

When price approaches these zones, it often triggers a mechanical reaction: a “billiard ball” effect where forced buying or selling drives the price back toward the center of the range.

Understanding that these ranges are enforced by the cost of capital (funding) rather than just “indecision” is vital for any entity looking to offer or trade these products.

A Brief History: From Shiller to the Crypto Boom

While perps feel like a crypto-native invention, their intellectual roots are deeply academic. Economist Robert Shiller first proposed the concept of perpetual futures in 1993.

His vision was to create derivatives markets for illiquid assets, like real estate or labor costs, which are notoriously difficult to price and settle on specific dates.

However, the idea remained largely theoretical until the crypto industry required a solution for liquidity fragmentation. In 2011, Alexey Bragin introduced an inverse perpetual contract for the ICBIT exchange.

But the true explosion occurred in 2016, when BitMEX (co-founded by Arthur Hayes) popularized the perpetual swap (XBTUSD).

Hayes and BitMEX revolutionized the space by offering up to 100x leverage on a contract that tracked Bitcoin’s spot price via the funding mechanism. This concentrated liquidity into a single instrument, solving the “rollover” problem and creating the deepest liquidity pools in crypto history.

Today, visionaries like Hayes predict that this model will eventually “kill” traditional stock exchanges by migrating equity price discovery to 24/7 crypto platforms, a trend we are already seeing with the launch of equity perps on decentralized platforms.

Types of Perpetual Contracts

For entrepreneurs looking to launch an exchange, choosing the right instrument architecture is crucial.

When trading futures, it’s important to understand the differences between perpetual futures and traditional futures contracts. We distinguish between three main types:

1. Linear Futures (USDT/USDC-Margined): The current industry standard. Traders use a stablecoin (like Tether) as collateral. The payout is linear: if BTC moves by 1 USD, the trader earns or loses 1 USD (adjusted for position size). This reduces currency risk for the trader. Bitcoin perpetual futures are commonly used for hedging and speculation, allowing traders to manage price risk or take directional bets.
2. Inverse Futures (Coin-Margined): The original BitMEX innovation. Traders use the asset itself (e.g., BTC) as collateral to trade BTC. This creates a non-linear payout curve (convexity), where the value of the collateral itself changes alongside the trade PnL. This is ideal for traders who want to stay strictly in crypto without touching fiat or stablecoins. Crypto perpetual futures enable traders to speculate on a wide range of cryptocurrencies and other assets, not just Bitcoin, without owning the underlying investments.
3. Quanto Futures: These settle in a third currency. For example, trading ETH/USD but settling the profit and loss in BTC. These are complex and require “convexity adjustments” due to the correlation risks between the varying assets, but they allow for unique hedging strategies. For instance, an investor holding a significant amount of Bitcoin can use perpetual futures to hedge against short-term market declines or adverse price movements.

Spot Market Influence

The spot market serves as the heartbeat of perpetual futures trading, providing the real-time price of the underlying asset that perpetual futures contracts are designed to track.

In the perpetual futures market, the price of the futures contract is closely tethered to the spot market price through the funding rate mechanism.

This system ensures that the perpetual futures price does not drift too far from the actual value of the underlying asset, maintaining a tight correlation between the two markets.

Whenever there is a divergence between the perpetual futures price and the spot market price, the funding rate comes into play.

If the perpetual futures contract trades above the spot price, the funding rate turns positive, incentivizing traders to take positions that bring the contract price back in line with the spot market.

Conversely, if the contract trades below the spot price, the funding rate becomes negative, encouraging the opposite adjustment. This dynamic keeps perpetual futures prices aligned with the spot market, making the spot price a crucial benchmark for all futures trading activity.

For traders, this close relationship means that perpetual futures can be used not only for speculation but also as effective tools for hedging against adverse price movements in the spot market.

By monitoring the spot market and understanding the funding rate mechanism, traders can better anticipate price movements and manage their exposure to risk.

At the end of the day, the spot market’s influence is foundational to the integrity and efficiency of perpetual futures trading, ensuring that the derivative contract remains a reliable reflection of the underlying asset’s value.

Also read: The A-to-Z of Spot Trading in Cryptocurrency

Price Movement Speculation

One of the most compelling features of perpetual futures trading is the ability it gives traders to speculate on the price movements of an underlying asset, without ever having to own the asset itself.

By entering long or short positions in the perpetual futures market, traders can profit from both upward and downward price trends, making these instruments highly attractive for those seeking to capitalize on market volatility and emerging trends.

Unlike traditional futures contracts, which come with a fixed expiration date and require traders to settle at a predetermined price, perpetual futures can be held indefinitely. This flexibility allows traders to maintain their positions for extended periods, adapting their trading strategies to evolving market conditions without the pressure of contract expiry.

The perpetual nature of these contracts means that traders can respond to market trends in real time, adjusting their exposure as price movements unfold.

High leverage is another hallmark of perpetual futures trading, enabling traders to control a larger position with a relatively small amount of initial capital. While this can amplify potential gains, it also increases the risk of significant losses, especially in volatile market conditions.

Effective risk management, such as using stop-loss orders and carefully monitoring position size, is essential to avoid amplified losses and further losses from adverse price movements.

The ability to speculate on price movements, combined with the flexibility to hold positions for as long as desired, makes perpetual futures a powerful tool for both short-term traders and those looking to ride longer-term market trends.

Whether aiming to profit from a price fall or a rally, perpetual futures allow traders to implement a wide range of trading strategies, making them one of the most liquid instruments in the cryptocurrency market today.

The Business of Perps: CEX vs. DEX

The market for providing perpetual futures is split between Centralized Exchanges (CEXs) and Decentralized Exchanges (DEXs).

For a business operator, the choice of model dictates your regulatory strategy, and there are significant risks involved in operating or trading perpetual futures on these platforms.

CEXs face regulatory and custodial risks, while DEXs must contend with smart contract vulnerabilities and evolving legal frameworks.

Centralized Exchanges (CEX)

Platforms like Binance and Bybit dominate, handling trillions in volume.

• Pros: High-speed matching engines (millisecond execution), deep liquidity, and fiat on-ramps. They account for over 90% of notional volume in major perps.
• Cons: Custodial risk (the exchange holds the funds). The collapse of FTX highlighted the dangers here, leading to increased regulatory scrutiny.
• Business Model: Earnings come from trading fees and the spread.

Decentralized Exchanges (DEX)

Platforms like Hyperliquid, dYdX, and GMX operate via smart contracts.

• Pros: Self-custody (users hold their own funds), transparency (all trades on-chain), and no initial KYC for users.
• Cons: High latency compared to CEXs, gas fees, and smart contract exploit risks. However, newer Layer-2 solutions are rapidly closing the speed gap.
• Business Model: Protocol fees, often shared with token holders or liquidity providers.

On a related topic: Difference Between DeFi, CeFi, and TradFi

The Strategic Shift: Why You Need a License to Compete

This is where the narrative shifts from how to trade to how to build. The “Wild West” era of launching a perpetuals exchange without regulatory oversight is rapidly closing.

Arthur Hayes noted that the regulatory landscape is shifting, with major financial capitals like Singapore and the US adapting their rules to accommodate, and regulate, perpetual products.

In the United States, the Commodity Futures Trading Commission (CFTC) has explicitly targeted decentralized platforms, vowing to enforce that commodity derivative trading occurs only on licensed venues.

Even decentralized entities are now in the crosshairs if they offer leverage to regulated markets without proper oversight.

For cryptopreneurs, this presents a binary choice: operate in the shadows and risk enforcement actions that could shut down your liquidity, or obtain a crypto license in a favorable jurisdiction.

How to Obtain and Start Trading (or Offering) Perps

For the Business Owner, “obtaining” perps means launching a platform. This requires:

1. Legal Structure: Incorporating in a crypto-friendly jurisdiction.
2. Licensing: Securing a VASP or derivatives license (LegalBison’s forte).
3. Tech Stack: Deploying a matching engine or liquidity pool protocol.
4. Liquidity Provision: Partnering with market makers to ensure depth.

For the individual trader, obtaining perps is a matter of venue selection:

Option A: The Centralized Route (Binance, Bybit)

1. Register: Create an account and complete KYC.
2. Deposit: Transfer USDT or crypto.
3. Trade: Access the “Futures” tab, select leverage (for example, 10x leverage allows you to control a position ten times larger than your deposited capital, amplifying both potential gains and risks), and execute.

Option B: The Decentralized Route (Hyperliquid, dYdX)

1. Wallet: Use a Web3 wallet like MetaMask.
2. Connect: Link to the DEX interface.
3. Trade: Execute trades via smart contracts, retaining custody until the moment of the trade.

Why LegalBison?

At LegalBison, we specialize in helping businesses secure the legal infrastructure necessary to offer derivatives and perpetual futures.

We understand that “perps” are not just trading tools; they are complex financial products that require a robust legal wrapper to survive in the today’s regulatory climate.

The benefits of licensing are not just about avoiding fines; they are about competitive advantage:

1. Banking Access: Unlicensed exchanges struggle to secure fiat on-ramps. A license opens doors to banking partners, allowing you to accept deposits and withdrawals seamlessly.
2. Trust & Liquidity: Institutional market makers, the entities that provide the deep liquidity required for a functional perp market, increasingly refuse to partner with unlicensed venues due to compliance risks.
3. Global Reach: While the US market is restrictive, jurisdictions like El Salvador, Poland, the Czech Republic, and VASP registrations in Europe offer favorable environments for crypto-derivative businesses.

We assist clients in identifying the optimal jurisdiction based on their target market and corporate structure.

Whether it involves setting up a VASP (Virtual Asset Service Provider) entity in Europe or navigating offshore licenses that allow for high-leverage offerings, our expertise ensures your platform is built on a foundation of legal certainty.

On another topic: Best Countries to Set Up a Crypto Spot Trading Company

Conclusion

Perpetual futures have fundamentally rewritten the operating system of the cryptocurrency market. They transformed a niche asset class into a 24/7, high-volume financial ecosystem where price discovery happens continuously.

By solving the issue of fragmented liquidity and contract expiration, perps have provided traders with powerful tools for speculation and hedging.

However, as the market matures, the infrastructure supporting it must mature as well. The era of unregulated derivatives platforms is fading.

For the next generation of exchange founders, success will depend not just on code and liquidity, but on compliance and corporate structuring.

Whether you are a trader looking to understand the mechanics of funding rates or an entrepreneur seeking to launch the next great derivatives exchange, understanding the legal and structural realities of perpetuals is the prerequisite for survival.

FAQ

What happens if the Funding Rate is negative?

When the funding rate is negative, it indicates that the perpetual price is trading below the spot price, usually signaling bearish sentiment.

In this scenario, traders holding short positions pay a fee to traders holding long positions. This incentivizes traders to open long positions (to earn the fee) and close shorts, helping push the price back up to parity with the spot market.

What is the difference between “Inverse” and “Linear” perpetuals?

The main difference is the collateral used. Linear perps are margined in stablecoins (like USDT), making profit and loss calculations straightforward (earn 1 USD for every 1 USD move).

Inverse perps are margined in the cryptocurrency itself (like BTC). This means if you are long BTC using BTC as collateral, and the price goes up, you earn profit and your collateral increases in value, creating a non-linear return profile.

Why is the funding interval usually 8 hours?

The 8-hour interval is an industry standard popularized by BitMEX and adopted by major exchanges like Binance.

It strikes a balance between providing frequent enough price corrections to keep the peg tight without imposing excessive transactional friction on traders. It effectively splits the daily interest and premium payments into three settlements per day.

Can I lose more money than I deposited when trading perps?

On most modern crypto exchanges, the answer is generally no, thanks to automated liquidation engines and insurance funds. If your position drops below your maintenance margin, the exchange will liquidate (close) your position.

While this results in a total loss of your specific margin, it prevents the account balance from going negative. However, leverage drastically increases the speed at which this total loss can occur.

How do I properly launch a perpetual futures exchange?

Launching a perp exchange requires navigating complex financial regulations. You generally need to incorporate in a jurisdiction that recognizes digital assets, obtain a Virtual Asset Service Provider (VASP) license, and ensure compliance with AML/KYC laws.

LegalBison specializes in this process, offering turnkey solutions for obtaining crypto licenses in favorable jurisdictions like Poland, the Czech Republic, or offshore hubs, allowing you to operate a compliant and bankable business.