The perpetual futures contract explained

Spot vs perp: what's actually different

When you buy Bitcoin on a spot exchange, you own the actual coin. You can withdraw it. You can hold it forever. It can go to zero, but it can't be taken from you because you 'used too much leverage.' Spot is ownership, plain and simple. A perpetual futures contract — almost everyone calls it a 'perp' — is a different animal. It's a bet on the price of an asset, settled in cash. You never own the underlying. You're not buying Bitcoin; you're buying exposure to its price.

Traditional futures contracts have an expiry date. You bet on what oil will cost in June, and the contract settles in June. Perpetual futures throw that out. They never expire. You can hold a perp position for an hour or a year. To keep the perp price tethered to spot, exchanges added one ingredient: a funding rate paid every eight hours between longs and shorts. We'll spend a whole lesson on it next — for now, just know it exists and it's what makes perps possible.

Why do most crypto traders use perps instead of spot? Three reasons. One: leverage. A perp lets you control a larger position with a smaller deposit. Two: you can short — bet on price falling — which is hard or impossible to do on most spot exchanges. Three: liquidity. The biggest perp markets like BTC/USDT and ETH/USDT trade far more volume than the matching spot pairs. Most of crypto's price discovery actually happens in the perp market, then bleeds into spot.

One more thing worth setting up early. On a spot trade, your loss is bounded by what you put in. Buy $500 of Bitcoin, and even if Bitcoin tanks 90%, you still walk away with $50 of coin. On a perp, your loss can be much bigger than your starting capital if you don't manage leverage. The exchange will close you before you go negative, but that closure can happen on a much smaller adverse move than you'd expect. This entire chapter is about understanding the levers that make perps work — funding rates, open interest, basis, liquidations — so you can use them with eyes open, or decide they're not for your account.

Recap: spot = you own the coin. Perp = a never-expiring leveraged bet on its price, kept honest by a funding payment. Most crypto trading volume happens on perps.