TL;DR
- 21Shares analyzed the differences between traditional and perpetual futures, which allow traders to open positions without an expiration date.
- Perpetual futures use a funding rate that governs payments between traders holding long and short positions to keep contract prices close to those of the underlying assets.
- These instruments allow trading around the clock and eliminate the need to roll contracts at expiration, although periodic funding payments can represent a cost for investors.
21Shares published an analysis explaining how perpetual futures work, derivative instruments that allow traders to speculate on an asset’s price without a fixed contract expiration date.
The 21Shares report was written by Eliézer Ndinga. It explains the differences between these instruments and traditional futures, particularly their settlement mechanisms and how their prices remain linked to the spot market.
Perpetual futures have gained popularity in cryptocurrency markets because they allow traders to keep their positions open without periodically replacing their contracts.
21Shares: Differences Between Traditional and Perpetual Futures
A traditional futures contract establishes a purchase or sale price for a future date. At expiration, typically weekly, monthly, or quarterly, the contract is settled in cash or through physical delivery of the underlying asset.
Perpetual futures, by contrast, have no expiration date. Their structure allows traders to maintain positions continuously without closing one contract and opening another to preserve exposure to the asset.
This renewal process, known as rolling, can generate fees and price slippage, meaning the difference between the expected execution price and the price at which a trade is actually executed.
The concept of perpetual futures was proposed in 1992 by economist Robert Shiller, although these instruments began gaining traction with the development of cryptocurrency markets during the 2010s.
Another characteristic is that perpetual futures can be traded 24 hours a day, seven days a week, including weekends and holidays, when many traditional financial markets are closed.
The Funding Rate
According to 21Shares, the main technical difference lies in the mechanism used to keep the contract price close to the value of the underlying asset.
With traditional futures, the contract price tends to converge with the spot price as the settlement date approaches.
Because perpetual futures have no expiration date, they use a funding rate, which establishes periodic payments between traders holding long and short positions. According to 21Shares, these payments typically occur every eight hours.
When the perpetual futures price exceeds the spot price, traders holding long positions pay those holding short positions. This mechanism is designed to encourage trades that narrow the gap between the two prices.
The size of the payment depends on how far the perpetual futures price has moved away from the spot market price.
Therefore, although these contracts eliminate the costs associated with periodically rolling traditional futures, maintaining a position may involve recurring funding payments, with their direction and amount depending on market conditions.
