Perpetual futures — often called "perps" — have become the dominant instrument in crypto trading. On any given day, perps volume dwarfs spot trading by a factor of five or more. If you're new to crypto trading, understanding perpetual futures is essential.
This guide breaks down everything you need to know to get started.
What Are Perpetual Futures?
A perpetual futures contract is a derivative — a financial instrument whose value is derived from an underlying asset. In crypto, that underlying asset is typically a token like BTC, ETH, or SOL.
Unlike traditional futures contracts, which expire on a specific date, perpetual futures have no expiration. You can hold a position for as long as you want, provided you maintain sufficient margin in your account.
When you trade perps, you're not buying or selling the actual cryptocurrency. Instead, you're entering a contract that tracks the price of that asset. This distinction matters because it unlocks several capabilities that spot trading doesn't offer.
Why Trade Perps Instead of Spot?
Go Long or Short
With spot trading, you can only profit when prices go up — you buy low and sell high. Perpetual futures let you profit in both directions. If you believe ETH is going to drop, you can open a short position and profit from the decline.
Leverage
Perps allow you to trade with leverage, meaning you can control a larger position than your account balance would normally allow. With 10x leverage, a $1,000 margin deposit controls a $10,000 position. This amplifies both gains and losses.
Capital Efficiency
Because of leverage, you don't need to commit your entire trading capital to a single position. You can maintain exposure to multiple assets simultaneously with a fraction of the capital required for equivalent spot positions.
Key Concepts You Need to Know
Margin
Margin is the collateral you deposit to open and maintain a leveraged position. There are two types:
- Initial margin: The minimum amount required to open a position. At 10x leverage, your initial margin is 10% of the position size.
- Maintenance margin: The minimum amount required to keep a position open. If your account balance falls below this level, you face liquidation.
Leverage
Leverage is the multiplier applied to your margin. Higher leverage means larger position sizes relative to your collateral, but also means smaller price movements can trigger liquidation.
Most experienced traders recommend starting with low leverage — 2x to 5x — until you develop a strong understanding of risk management.
Liquidation
Liquidation occurs when a position's losses approach the margin deposited. The trading engine automatically closes your position to prevent further losses. Understanding your liquidation price before entering a trade is critical.
Funding Rate
Since perpetual futures have no expiration date, they use a mechanism called the funding rate to keep the contract price aligned with the spot price of the underlying asset.
- When the perps price trades above spot (bullish sentiment), longs pay shorts.
- When the perps price trades below spot (bearish sentiment), shorts pay longs.
Funding payments are exchanged between traders at regular intervals — typically every eight hours. This is a unique mechanic of perps that doesn't exist in spot trading.
Mark Price vs. Last Price
- Last price: The price of the most recent trade executed on the exchange.
- Mark price: A calculated fair value price, usually derived from spot prices across multiple exchanges. Liquidations are based on mark price to prevent manipulation.
How a Perps Trade Works: A Step-by-Step Example
Let's walk through a simple long trade on BTC:
- BTC is trading at $60,000. You believe the price will rise.
- You deposit $1,000 as margin and select 10x leverage.
- Your position size is $10,000 — equivalent to 0.1667 BTC.
- BTC rises to $63,000 — a 5% increase.
- Your profit is $500 (5% of $10,000), representing a 50% return on your $1,000 margin.
- You close the position and collect your margin plus profit.
If BTC had dropped 5% instead, you'd have lost $500 — half your margin. At roughly a 9-10% drop (depending on fees and funding), you'd face liquidation and lose your entire $1,000 margin.
On-Chain vs. Off-Chain Perps
Traditionally, perpetual futures were traded exclusively on centralized exchanges (CEXs). In recent years, on-chain perpetual futures platforms have emerged, offering several advantages:
- Self-custody: Your funds remain in your wallet until a trade is executed.
- Transparency: Every trade, liquidation, and funding payment is verifiable on-chain.
- No counterparty risk: You're not trusting a centralized entity to hold your funds.
On-chain perps have reached a level of performance and liquidity that makes them competitive with their centralized counterparts.
Getting Started: Practical Tips
Start Small
Don't commit significant capital while you're learning. Use small position sizes to understand the mechanics without risking meaningful losses.
Use Low Leverage
High leverage is tempting but dangerous. Start with 2-3x leverage until you're comfortable with how positions behave, how funding works, and how quickly losses can accumulate.
Set Stop Losses
A stop loss is an order that automatically closes your position if the price moves against you by a specified amount. Always define your maximum acceptable loss before entering a trade.
Understand the Costs
Perps trading involves several costs beyond the obvious:
- Trading fees: Charged when you open and close positions.
- Funding payments: Can be positive or negative depending on market conditions.
- Slippage: The difference between expected and executed price, especially relevant for large orders or illiquid markets.
Keep a Trading Journal
Track every trade you make — the reasoning, the outcome, and what you learned. This practice is invaluable for improvement and is a habit shared by virtually every successful trader.
The Competitive Edge
One of the most exciting developments in perps trading is the emergence of competitive trading platforms where traders can test their skills against each other directly. Rather than simply trading in isolation, competitive formats like 1v1 duels and leaderboard rankings add a layer of accountability and skill verification that traditional trading lacks.
When your performance is measured against other traders in real time, the feedback loop tightens. You learn faster, identify weaknesses sooner, and develop the discipline that separates profitable traders from the rest.
What's Next?
Now that you understand the fundamentals of perpetual futures, the next steps are to deepen your knowledge of specific topics:
- Leverage and margin — understanding the math behind position sizing and liquidation
- Risk management — protecting your capital across all market conditions
- Technical analysis — reading charts and identifying trading opportunities
- Trading psychology — mastering the emotional challenges of trading
Each of these topics deserves its own deep dive, and mastering them is the path from beginner to consistently profitable trader.
The most important thing? Start. Open small positions, observe how funding rates affect your account, practice setting stop losses, and learn from every trade. There's no substitute for experience. Start trading on Legend.