What Are Perps? Inside Crypto’s Most Traded Derivatives Contract
Key Takeaways
- •Perpetual swaps account for an estimated $40 trillion to $50 trillion in annual crypto trading volume and are used far more than spot markets.
- •BitMEX launched the modern perpetual swap in 2016 to eliminate futures expiration and allow positions to be held indefinitely.
- •An eight-hour funding payment transfers money between longs and shorts to keep perpetual prices close to the spot market.
- •Leverage on perpetual swaps can be extremely high, and exchanges use automated liquidations to limit losses.
- •Perpetual swaps now lead crypto price discovery, and U.S. regulators are exploring versions for traditional assets, including possible CME equity listings.
Perpetual swaps, also called perpetual futures or “perps,” are the dominant trading instrument in the crypto market, processing an estimated $40 trillion to $50 trillion in annual volume. They far exceed spot trading and are the product professional traders, hedge funds and retail speculators often use when they want leveraged exposure to the price of bitcoin or ether without owning the underlying asset. Despite their widespread use, the mechanics that make perpetual swaps work are not widely understood.
To understand perps, it helps to look at what came before them. In traditional finance, leveraged exposure to an asset usually comes through a futures contract: an agreement to buy or sell something at a set price on a specific date. When that date arrives, the contract expires and settles. Traders who want to maintain the position must roll it into the next contract.
In crypto’s early years, that structure created persistent problems. Futures often traded at a premium to the spot price of bitcoin, a concept known as basis, which confused retail traders looking for simple directional exposure. And every time a contract expired, positions closed whether traders wanted them to or not. BitMEX, the derivatives exchange founded by Arthur Hayes and Ben Delo in 2014, spent much of a year trying to solve the problem by shortening contract durations, moving from quarterly to monthly, then weekly, then 48-hour and 24-hour expiries. None of those changes was enough.
A contract that never expires
The perpetual swap, developed by Delo and launched by BitMEX in 2016, addressed the issue by eliminating the expiry date altogether. The result was a derivative contract that tracks the price of an asset indefinitely. There is no settlement date, no rolling and no expiry. Traders can hold a position for hours or years.
That design immediately created a structural challenge. Without an expiry date to act as an anchor, nothing would naturally force the contract price back toward the spot price of the underlying asset. BitMEX solved that problem with a mechanism that has since become the industry standard.
Every eight hours, a payment is exchanged between traders on opposite sides of the market. If the perpetual swap is trading above the spot price, indicating excess demand for long positions, traders who are long pay traders who are short. If the perpetual swap is trading below spot, the payment goes the other way. The exchange takes no cut. The rate of that payment, known as the funding rate, is calculated based on how far the perpetual swap price has deviated from spot over the previous eight-hour window. The greater the deviation, the higher the rate.
This creates a self-correcting equilibrium that also shapes how traders use the contract. When longs are charged a substantial funding rate, it becomes expensive to hold the position, which reduces demand and pulls the price back toward spot. Market makers help accelerate the process by shorting the perpetual swap and buying spot whenever a meaningful premium opens up, capturing the difference as profit. The funding-rate mechanism is now used, in essentially the same form, by every major derivatives exchange in the world, which helps explain why perps became so deeply embedded in crypto market structure.
The role of leverage
The other defining feature of perpetual swaps is leverage. Most exchanges allow traders to control positions much larger than their deposited capital, with limits that vary by platform and jurisdiction. At BitMEX in its prime, leverage of up to 100 times was available, meaning a 1% move in bitcoin’s price could produce a 100% gain or loss on a fully leveraged position.
To manage the risk that leverage creates for the exchange, perpetual swap platforms use automated liquidation systems. If a trader’s losses approach the value of the margin they posted, the system closes the position before it can go negative, protecting the exchange from absorbing the deficit. The speed and reliability of that liquidation engine became a major competitive differentiator in the early years of the market and remains central to how exchanges compete today.
Perpetual swaps are now the primary venue for price discovery in crypto. When bitcoin moves sharply, the move typically begins in perp markets before spreading to spot, making these contracts a key reference point for the broader market even for traders who never use leverage themselves. The structure Delo built in 2016 has also proved durable enough that regulators in the U.S. are now exploring its application to traditional assets, with the CME potentially listing perpetual swaps on equities.
What began as a workaround for the limitations of crypto futures has become one of the most traded financial products in the world.
