Perpetuals, funding rates and liquidation
Perpetuals are the fastest way to lose an account in crypto. If you are going to use them, understand the mechanics first.
What a perpetual is
A futures contract with no expiry, tracking the spot price. Because it never settles, something has to keep it tethered to spot. That something is funding.
Funding is a holding cost
Every few hours, longs pay shorts or shorts pay longs depending on which side the contract is trading. In a strong bull market longs pay continuously. Hold a leveraged long through an enthusiastic month and funding alone can cost several percent, before the price does anything.
Liquidation is not partial
When your margin can no longer support the position it is closed by the exchange, usually with a fee on top. At 10x leverage a 10 percent adverse move is enough. At 50x, 2 percent. Crypto routinely moves 2 percent in an hour.
If you are going to do it anyway
- Work out your liquidation price before you open, not after.
- Keep leverage in low single digits.
- Use isolated margin so one position cannot take the whole account.
- Set a stop and accept it.
- Understand that funding makes long holds expensive even when you are right.
BEFORE YOU MOVE ON
Common questions
What is a funding rate?
A periodic payment between longs and shorts that keeps a perpetual tethered to spot. If you are on the crowded side you pay it continuously, which makes long holds expensive.
What happens when I get liquidated?
The position closes entirely and your margin for it is gone, usually with a fee on top. It is not partial and it cannot be reversed.
Risk warning: crypto is highly volatile and largely unregulated. You can lose everything you put in. Nothing here is financial, investment or tax advice.