Perpetual Futures Contract

Perpetual futures contracts allow traders to take long or short positions on an asset indefinitely. These contracts enable traders to earn periodic profits if their position aligns with the market direction. The profit mechanism involves payments from the losing side to the winning side. The amount traders pay or receive depends on the difference between the perpetual futures contract price and the underlying asset's market price, often referred to as the funding rate.

Traders holding long positions profit when the asset's price rises after they enter the trade. Traders with short positions benefit when the price falls after they enter the trade. Unlike traditional futures, perpetual contracts don't have a settlement date, allowing traders to maintain their positions for as long as they wish. Earning profits indefinitely.

Perpetual Contract Price And Funding Rate

The price of a perpetual contract closesly mimicks the the price of the underlying asset. The funding rate helps the perpetual contract prices stays as close as possible to the price of the underlying asset. The funding rate determines the periodic payments between the winning and losing positions during this time period.

Funding rates can be positive or negative. When the contract price is higher than the spot price, the rate is positive, and long position holders pay short position holders. When the contract price is lower than the spot price, the rate is negative, and short position holders pay long position holders. The funding rate calculation considers the perpetual contract's price, the spot price of the underlying asset, and an interest rate component. The interest rate factor accounts for borrowing or lending costs of the underlying asset.