Crypto Contract Trading: Perpetuals, Futures and Funding Rates

A crypto contract is an agreement to settle the price difference of a coin at some future point. You never own the underlying token. You post margin, the broker tracks the price, and your profit or loss is the price move multiplied by your contract size, minus the funding you paid or received along the way. Two formats dominate: perpetuals (no expiry, funding paid every eight hours) and dated futures (fixed expiry, no funding).

How a perpetual contract works

A perpetual is a futures contract with no expiry. To keep its price tracking the underlying spot, the protocol charges or credits a funding rate every eight hours. The mechanism:

1. If the perp price is above spot, longs pay shorts.
2. If the perp price is below spot, shorts pay longs.
3. The rate scales with the gap: a 0.05% funding rate per 8 hours is a 54% annualised cost or income, depending on which side you are on.

Result: in a roaring bull market, perp longs bleed funding to shorts. In a deep sell-off, the opposite happens. A trader who ignores funding can hold a “winning” position for a month and net zero or worse after carry.

How a dated futures contract works

A dated future expires on a specific date. It trades at a basis to spot: the difference between contract price and spot price, which is the market’s implied cost of carry. As expiry approaches, basis converges to zero. There is no funding rate. The full carry is priced into the contract at trade entry.

Practical comparison:

• Perp: cleaner mental model on entry, but funding can grind a position over time.
• Dated future: known cost up front, but you have to roll positions before expiry or accept settlement.

Margin and liquidation

Three numbers run a contract trade:

1. Initial margin: the deposit you post to open. At 1:2 retail crypto leverage (ESMA caps), the initial margin is 50% of notional.
2. Maintenance margin: the minimum equity the broker requires to keep the position open. Below this, you receive a margin call.
3. Liquidation price: the price at which the broker auto-closes your position to prevent further loss. Most retail platforms include negative balance protection, so liquidation caps your loss at the margin posted.

A 100-contract long on bitcoin at $60,000 with 1:2 leverage requires $30,000 of initial margin. If BTC drops to $40,000, the position is down $20,000. If the maintenance margin is 25%, you would receive a call before liquidation kicks in. Negative balance protection means you cannot owe more than the $30,000 initial.

Why retail traders use contracts

Three reasons we see across retail flow:

1. Capital efficiency. Same exposure, less cash tied up. The flip side: same loss, faster.
2. Short exposure. Spot only goes long. Contracts let you express a bearish view.
3. Hedging. A long-term spot holder can short a perp to neutralise short-term downside without selling the underlying.

What goes wrong

The four classic failure modes:

• Leverage creep. Starting at 1:2, then bumping to 1:5, then 1:10 after a winning streak. The risk-of-ruin curve is non-linear; a 50% drawdown at 1:10 wipes the account.
• Funding ignorance. Holding a perp for weeks without modelling carry. Track funding daily.
• Cross-margin contamination. A losing position on one contract eating margin from a winning one. Use isolated margin until you can quote your portfolio Greek-equivalent in your sleep.
• News-driven gaps. Crypto trades 24/7 but liquidity is uneven. A weekend ETF rumour or exchange exploit can move BTC 10% in 30 seconds. Protective stops fail to fill at advertised price.

Crypto contracts at Volity

Volity offers crypto CFD exposure on 20+ coins. Retail leverage is capped at 1:2 under ESMA. Professional clients on request may access higher leverage subject to MiFID II suitability assessment. Negative balance protection applies on retail accounts. Execution is by UBK Markets Ltd (CySEC 186/12). For an unleveraged alternative, see our guide on spot trading crypto.