Perpetual futures, funding rates and liquidations, explained

Perpetual futures are the instrument that most crypto trading volume actually runs through. On a typical day the notional volume in perps is several times the volume in spot markets, and the funding and liquidation data they generate are read by every serious trader as a map of where the market is leveraged and where it is fragile. The contract was invented by BitMEX in 2016 as a way to offer futures-like leverage without the complication of expiring contracts, and its design has barely changed since.

How the contract works

A conventional future settles on a date. A perp never settles; it can be held indefinitely. A trader posts margin, chooses leverage, and takes a long or short position whose profit and loss is marked continuously against the contract’s price. What stops the perp price from drifting away from the spot price, without an expiry to force convergence, is the funding rate. At fixed intervals, usually every eight hours, one side pays the other a fee proportional to the gap between the perp price and a spot index. If the perp trades above spot, longs pay shorts, which makes being long more expensive and pulls the price back down. If it trades below, shorts pay longs. The payment goes between traders, not to the exchange.

Funding is therefore a barometer. Persistently high positive funding means the market is crowded long and paying dearly for it, a condition that often precedes a sharp correction as those positions get squeezed. Negative funding after a sell-off means shorts are paying to stay short, which is the setup for a squeeze in the other direction. Annualized, funding rates on major venues have ranged from a few percent to well over 100 percent at the peaks of speculative episodes, which is the source of the basis trade: an institution buys spot (or a spot ETF) and sells the perp or the CME future, collecting funding while hedged against price.

Margin, leverage and liquidation

Leverage on perps commonly runs to 20, 50 or 100 times. At 20 times, a 5 percent move against the position wipes out the margin. Exchanges do not wait for that: each position has a liquidation price at which the venue’s engine takes over and closes it in the market, keeping a fee and any remaining margin. On a large move, thousands of positions hit their liquidation prices at once, the forced selling pushes the price further, and the next tier of positions liquidates. That cascade is why crypto moves are so often violent and why the largest single-day liquidation events, which have exceeded $1 billion and in October 2025 reached an estimated $19 billion across venues in a single day, coincide with the sharpest price swings.

Cross margin, where one collateral pool backs all positions, and isolated margin, where each position has its own, change how a liquidation propagates through an account. Exchanges also maintain insurance funds to absorb losses when a liquidated position cannot be closed at a price that covers the margin; when the fund runs out, some venues fall back on auto-deleveraging, closing profitable positions on the other side, which is a risk unique to this market.

Reading the data

Three numbers do most of the work. Open interest, the total notional of outstanding contracts, shows how much leverage is in the system; rising open interest with a flat price means positions are building for a move. Funding rate, as above, shows which way they lean. And the liquidation map, an estimate of where liquidation prices cluster above and below the current price, shows where a move would accelerate. Public dashboards from Coinglass, Velo and others publish all three, and CCS maintains its own liquidation map on the prices section of this site. Traders use them to avoid placing stops where everyone else’s liquidations sit and to anticipate the levels where a move is likely to run.

Where perps trade

The largest venues are offshore centralized exchanges: Binance, Bybit, OKX and Bitget account for most global volume and are generally not available to US persons. On-chain perp exchanges grew rapidly in 2024 and 2025, led by Hyperliquid, which runs an order book on its own chain and at times has handled volume comparable to the mid-tier centralized venues, with the advantage that positions and the insurance fund are visible on-chain. For regulated US institutions the path is different: CME’s bitcoin and ether futures and options are the deepest regulated market and expire monthly, and a handful of CFTC-registered exchanges have launched perpetual-style contracts under US rules since 2025. The CFTC’s stated intention to allow perps on regulated designated contract markets is one of the more consequential regulatory shifts for market structure, because it would bring the dominant crypto instrument inside the US perimeter for the first time.

Why it matters beyond trading

Perps set the price. Because the volume and the leverage sit there, spot markets and even ETF flows often follow moves that originate in the derivatives book. An institution with no intention of ever trading a perp still needs to understand funding, open interest and liquidation clustering, because those are the variables that explain why the asset it holds just moved 8 percent in an hour on no news.