Perpetual futures and funding
Lesson 2 of 16 in the course “Futures from Zero”. Free, with animations and a quiz.
Futures with no expiry
On big exchanges, oil and gold futures have an expiry: on the set day the contract closes. In 2016 the crypto exchange BitMEX launched the perpetual futures (a “perp”). No expiry, hold the position for a year if you want. Today it’s the main product of nearly every crypto exchange: when someone posts “I trade bitcoin futures”, they almost always mean perps.
Why there are three prices
Open any futures terminal and you’ll see three prices side by side. Last is the price of the latest trade. Index is the coin’s average price across several regular (spot) exchanges. Mark is what the exchange uses to count your profit and liquidation. It exists so one sharp spike on one exchange doesn’t liquidate half the traders.
Funding: a magnet to the real price
A perp has no date when its price must meet the coin’s price. So exchanges invented funding: regular payments between traders. If the futures is pricier than the coin (everyone bets on a rise), longs pay shorts. If it’s cheaper, the other way round. This makes extra bets on a rise more expensive and pulls the price back to the real one. Usually it’s paid every 8 hours, about 0.01% of position size in a calm market. The exchange keeps nothing here: traders pay each other.
Let’s count it
Nika opened a $1,000 long. At 0.01% per 8 hours she pays 10 cents, no big deal. But in a hype, when everyone buys, the rate can be 0.1% or more. That’s $1 every 8 hours, and about $90 a month, nearly 9% of the position. The trade can stand still while money leaks out. So before holding a position for days, check the Funding line.
Check yourself
- How is a perpetual different from a regular futures?
Correct answer: It has no settlement date. You can hold a perp as long as you like, there’s no expiry. Funding keeps the price from drifting away from the real one. - The futures is clearly pricier than the coin, funding is positive. Who pays whom?
Correct answer: Longs pay shorts. When the crowd bets on a rise and the futures price runs ahead, longs pay. That makes overheating costly. - Nika wants to hold a long for a week, and funding is 0.1% every 8 hours. What matters?
Correct answer: Over a week that’s about 2% of the position even if the price stands still. 21 payments of 0.1% make 2.1% of position size. With leverage that’s a big chunk of the margin.