Perps and leverage: the basics and the risks
The most heavily traded instrument in crypto, and where the most accounts get destroyed. Both facts come from leverage.
Perpetual futures ("perps") are the most heavily traded instrument in crypto — and where the most accounts get destroyed. Both facts come from leverage.
From futures to perpetuals
Start with a normal futures contract: an agreement to gain or lose based on an asset's price without owning it, settling on a fixed expiry. As expiry nears, the contract's price is dragged toward spot, because at settlement they must meet.
A perpetual removes the expiry, so you can hold indefinitely — but that destroys the thing that kept a normal future anchored to spot. So perps replace it with the funding rate: a small periodic payment exchanged directly between traders (not to the exchange), typically every eight hours.
- When the perp trades above spot (too many longs), funding is positive — longs pay shorts, nudging the price down.
- When it trades below (too many shorts), funding is negative — shorts pay longs.
Funding is the economic tether that keeps a never-expiring contract honest, and a real recurring cost: hold the crowded side and you bleed funding every eight hours while you wait. (The idea traces to economist Robert Shiller in the early 1990s; BitMEX introduced the crypto perpetual in 2016.)
Leverage does the damage
Leverage lets you control a position larger than your deposit — 10× means $1,000 controls $10,000, multiplying gains and losses alike. The exchange protects itself with liquidation: you must keep a minimum margin (the maintenance margin), and the moment it falls below that threshold, the exchange automatically closes your position to repay the loan.
- 10× leverage → a 10% adverse move wipes out your deposit
- 50× → 2%
- 100× → 1%
In a market that swings several percent in minutes, high leverage is a near-certain path to liquidation given enough time. The trap: leverage tempts you to size up, and the bigger the leverage, the less room price has to breathe before liquidating you — even if your thesis was right. The market can move against you briefly, liquidate you, then go exactly where you predicted.
A note on the present
Through 2026, perps are moving from offshore venues toward regulated markets, including a contested US arrival with the CME Group and the CFTC disputing how they should be classified. (This is fast-moving — verify current specifics.)
Why it matters. The funding rate is a small marvel — a contract kept honest not by a court or clearinghouse but by a self-correcting incentive that strangers enforce by pursuing their own interest. But perps are also where open access curdles into a casino: leverage available to anyone becomes a machine for transferring wealth from the impulsive to the disciplined.