Perpetual futures, funding rates, and liquidation

The most traded crypto instrument isn't Bitcoin itself — it's the perpetual future, a leveraged contract with no expiry date. Perpetuals make it easy to go long or short with high leverage, which is exactly why they're responsible for so many wiped-out accounts. This lesson explains how perpetuals stay linked to the spot price, what funding costs, and precisely how and when positions get liquidated.

What you'll learn

• Spot vs futures vs perpetual futures
• How funding rates work, and how to calculate funding cost
• Mark price vs last price
• Isolated vs cross margin
• How to calculate a liquidation price — and how to stay far away from it

1. Spot, futures, and perpetuals

Perps let you go short as easily as long and hold positions indefinitely. Because there's no expiry forcing the price back to spot, they use a funding rate instead.

2. Funding rates

At regular intervals — commonly every 8 hours, though some exchanges use shorter intervals — traders on one side of the market pay traders on the other:

• Positive funding: perp price is above spot (the market is leaning long) → longs pay shorts
• Negative funding: perp price is below spot (leaning short) → shorts pay longs

This payment nudges the perp price back towards spot. It's paid between traders, not to the exchange.

Worked example: funding cost

(Illustrative.) You hold a $10,000 long BTC perp position. Funding is +0.01% per 8-hour period.

• Per period: $10,000 × 0.01% = $1.00
• Per day (three periods): $3.00
• Over 30 days: about $90

If funding rises to +0.10% during a euphoric rally, the same position costs $30 a day — around $900 a month. Funding is calculated on the full position size, not your margin.

3. Mark price vs last price

• Last price — the most recent trade on that exchange
• Mark price — a fair-value price, usually based on spot prices across several exchanges

Exchanges generally use the mark price to calculate unrealised profit and loss and liquidations, which protects traders from being liquidated by a brief spike on one exchange. Check which price your stop-loss orders trigger on.

4. Isolated vs cross margin

Beginners are usually safer with isolated margin: a mistake on one position can't take the whole account with it.

5. Liquidation

If losses reduce your margin below the maintenance margin, the exchange closes (liquidates) your position — usually with an extra fee.

Approximate liquidation price, isolated margin:

• Long: entry × (1 − 1 ÷ leverage + maintenance margin rate)
• Short: entry × (1 + 1 ÷ leverage − maintenance margin rate)

(Exchanges' exact formulas differ; always check the liquidation price your platform shows.)

Worked example

(Illustrative.) Long BTC at $60,000, isolated margin, maintenance margin rate 0.5%.

Bitcoin regularly moves 3–5% in a day. At 25× or 50×, an ordinary move liquidates you.

The professional approach

Liquidation is not a stop-loss — it's a failure of risk management.

1. Place a stop-loss where your trade idea is wrong (see Stop-loss / take-profit logic).
2. Size the position so the stop equals your risk per trade (see Position sizing 101).
3. Choose leverage so the liquidation price is far beyond your stop — ideally so far that it's irrelevant.

(Illustrative.) Account $5,000, risk 1% = $50. Long BTC at $60,000 with a stop at $58,200 (3% away).

• Position size = $50 ÷ 3% = $1,667 notional
• That needs only about $333 of margin at 5×, with liquidation around $48,300 — far below the stop.

Common beginner mistakes

• Using maximum leverage because the exchange allows it.
• Letting liquidation act as the stop-loss.
• Ignoring funding costs on positions held for days or weeks.
• Using cross margin without understanding the whole balance is at risk.
• Holding leveraged positions over weekends and through thin, spiky markets.

Key terms

Practice

1. On your exchange (or its demo), open a perp order ticket and note the liquidation price shown at 2×, 10×, and 25× leverage.
2. Find the current funding rate for BTC and ETH perps, and calculate the daily cost of a $5,000 position.
3. Size a hypothetical trade using your stop and 1% risk, then choose leverage so liquidation is at least twice as far away as your stop.
4. Check whether perpetuals or crypto derivatives are legally available to retail traders where you live (see Tokenomics and regulation).

Quick recap

• Perpetuals are futures with no expiry, kept near spot by funding.
• Funding is charged on the full position, and can become expensive in crowded markets.
• Exchanges usually liquidate on the mark price.
• Isolated margin limits damage to one position; cross margin risks the whole balance.
• Size from your stop-loss, and keep liquidation far beyond it.

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