Futures vs. Perpetual Contracts

Comparison of Derivative Contract Types

Futures Contracts

A futures contract is a derivative instrument that represents an agreement to buy or sell an asset, such as Bitcoin or other commodities, at a predetermined price on a specified future date. These contracts can be either physically settled (delivering the actual asset) or cash-settled (paying the difference in price).

Margin collateral for futures contracts can be denominated in cryptocurrencies, allowing traders to speculate on future prices using crypto as collateral, or in stablecoins like USDT/USDC for added flexibility.

Perpetual Contracts

Unlike traditional futures contracts, perpetual contracts do not have an expiry date. Instead, they incorporate a mechanism called "funding" to help align their price with the spot market index.

The funding mechanism incentivizes market participants to ensure the perpetual contract price remains close to the underlying asset's spot price. When a perpetual contract trades at a premium to the index price, long position holders must pay a funding fee to short position holders. Conversely, if the contract trades below the index price, short position holders compensate long position holders. This dynamic helps stabilize the contract price relative to the underlying asset.

Key Differences Between Futures & Perpetual Contracts

The main distinctions between these two types of derivative contracts are:

• Expiry and Settlement: Perpetual contracts do not have an expiry date, whereas futures contracts settle at a predetermined date.

• Funding Mechanism: Perpetual contracts use a funding rate system to ensure price alignment with the spot market, whereas futures contracts may trade at a discount or premium until settlement.

• Contract Specifications: Each exchange may implement different index price sources and funding rate mechanisms for perpetual contracts, making it essential to evaluate platform-specific terms before trading.