Perpetual swaps, also called perpetual futures or “perps” for short, are the dominant trading instrument in the crypto market, processing an estimated volume of $40-50 trillion per year. They eclipse spot trading and are the product professional traders, hedge funds and retail speculators seek when they want leveraged exposure to the price of bitcoin or otherwise without owning the underlying asset. Despite their ubiquity, the mechanisms that make them work are not widely understood.
To understand criminals, it helps to understand what came before them. In traditional finance, leveraged exposure to an asset is typically through a futures contract, an agreement to buy or sell something at a fixed price and on a specific date. When this date arrives, the contract expires and settles. Traders who want to maintain their position must roll it into the next contract.
In the early days of cryptography, this practice created persistent problems. Futures contracts traded at a premium to bitcoin’s spot price, a concept known as basis, which confused retail traders who wanted simple directional exposure. And every time a contract expired, positions were closed whether traders wanted them to or not. BitMEX, the derivatives exchange founded by Arthur Hayes and Ben Delo in 2014, spent the better part of a year shortening contract durations to try to solve this problem, going from quarterly to monthly to weekly expiration to 48 hours to 24 hours, but none of it was enough.
A contract that never expires
The perpetual swap, developed by Delo and BitMEX launched in May 2015, solved the problem by eliminating the expiration date entirely, creating a derivative contract that tracks the price of an asset indefinitely. There is no settlement date, no rollover and no expiration. Traders can hold a position for hours or years. This created an immediate structural challenge: without an expiration date serving as an anchor, nothing would naturally force the contract price back toward the spot price of the underlying asset. BitMEX solved this 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 trades above the spot price, indicating excessive demand for long positions, long traders pay short traders. If the perpetual swap trades below spot, the payment goes the other way. The exchange does not take any discounts. The rate of this payment, called the funding rate, is calculated based on the difference between the perpetual swap price and the spot price during the previous eight-hour window. The greater the difference, the higher the rate. This creates a self-correcting balance. When long positions are charged a substantial funding rate, it becomes expensive to hold the position, reducing demand and driving the price back toward the spot. Market makers accelerate this process by shorting the perpetual swap and buying spot whenever a significant premium opens, capturing the difference as profit. The funding rate mechanism is now used, in essentially the same form, by all major derivatives exchanges around the world.
The role of the lever
The other defining characteristic of perpetual swaps is leverage. Most exchanges allow traders to control positions significantly larger than their deposited capital, with limits varying by platform and jurisdiction. At BitMEX, at its peak, up to 100x leverage was available, meaning a 1% change in the price of Bitcoin would produce a 100% gain or loss on a fully leveraged position. To manage the risk this creates for the exchange, perpetual swap platforms use automated liquidation systems. If a trader’s losses approach the value of their deposited margin, the system closes the position before it becomes negative, preventing the exchange from absorbing the deficit. The speed and reliability of this liquidation engine became a key competitive differentiator during the market’s early years and remains essential to competition among exchanges today.
Perpetual swaps are now the primary venue for price discovery in crypto. When Bitcoin moves sharply, the movement usually originates in insight markets before spreading to the spot. The structure built by Delo in 2015 has proven durable enough that US regulators are now studying its application to traditional assets, with the CME potentially listing perpetual equity swaps. What started as a workaround to the limitations of crypto futures has become one of the most traded financial products in the world.
