cryptotradingbook

Perpetual futures and funding

Intermediate → Advanced · ~12 min read

At a glance

  • Perpetuals are futures without expiry; funding keeps their price near spot.
  • Funding is a periodic payment between longs and shorts - hot markets make it expensive.
  • Funding is a cost (or yield) that compounds and is ignored in most retail P&L.
  • Extreme funding is a crowd indicator: everyone on one side is the fuel.
  • Retail derivatives are banned or restricted in several countries (UK since 2021).

1. What perpetuals are

Perpetual futures ("perps") mimic the spot price without ever settling - the bridge is funding: a periodic payment (typically every 8h) between the two sides, pushing the perp price toward spot. They are the most traded crypto instrument - and the least understood by the people trading them.

2. How funding works

When perps trade above spot, longs pay shorts (positive funding); below, shorts pay longs. The rate is usually small - 0.01% per interval - but in manias it reaches 0.1-0.3% per period, i.e. 1-3% per day, 30-90% annualised. Holding a "cheap" leveraged long through a mania can pay a third of the position in funding while price goes nowhere.

LONGSbet on price uppay funding when positiveSHORTSbet on price downreceive when positivefunding →← negative fundingTypical: 0.01% per 8h (calm) · Mania: 0.1–0.3% per 8h ≈ 30–90% annualisedLONGSbet onprice uppay whenpositiveSHORTSbet onprice downreceivewhen positivepos.neg.Typical: 0.01% per 8h (calm)Mania: 0.1–0.3% per 8h≈ 30–90% annualised
Figure 14.1 — Funding keeps perpetuals near spot: the crowded side pays. Extreme funding is a crowd thermometer, not a forecast.

3. Funding as a crowd thermometer

Persistently extreme funding marks a crowded trade: when everyone is long and paying dearly to stay long, the fuel for a downside cascade is fully stacked. Negative extremes do the same for shorts. Funding does not time tops - it shows which side of the boat is full.

Remember: Your leveraged long has two clocks running: the chart and the funding clock. Most traders watch one.

4. The regulatory frame - facts, not opinions

Retail crypto derivatives are prohibited in the UK (FCA, since 2021) and restricted in other jurisdictions; several regulated venues offer them only to professional or non-retail clients. Where they are available offshore, the provider is often unlicensed in your jurisdiction - the availability problem compounds the leverage problem. Check the profile's regulation facts before anything else.

5. When this fails

Perp logic fails against the same forces as all leverage - liquidation mechanics, gaps, cascades - plus funding spikes exactly when holding is hardest. A long through a 200%-funding squeeze must be right about direction and endure a daily tax that can exceed its planned edge.

Risk: Perps are the retail-optimised instrument of the leverage chapter - everything dangerous there, compounded here. If Part V changed your answer to "how much leverage", use position sizing on spot instead until the answer is boring.

Knowledge check

  1. What keeps a perp near spot price? (Funding - periodic payments between longs and shorts.)
  2. Positive funding means who pays whom? (Longs pay shorts.)
  3. Annualised 0.1% funding per 8h equals roughly what? (~110% annualised - a mania signal and a holding cost.)
  4. What does extreme funding tell you about the crowd? (Which side is crowded - fuel for a cascade against it.)
  5. Name a jurisdiction where retail crypto derivatives are banned. (UK - FCA ban since 2021; also restricted elsewhere.)