How Perpetual Futures Work
A perpetual future follows a reference market without a fixed expiry. A trader opens long or short exposure rather than normally owning the underlying asset, and posts margin to support that exposure. Funding and venue pricing systems help keep the contract connected to its reference market. The position ends when the trader closes it, when liquidation rules close it, or when a venue discontinues the market. The mechanics are shared in broad outline; the exact index, funding, margin and liquidation rules are always contract-specific.
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How a Perpetual Contract Follows a Market
A BTC perpetual is a derivative linked to a BTC reference market. The contract has its own order book or execution mechanism, so its last traded price can briefly differ from the spot index it follows. An index price is a venue-defined reference, commonly built from one or more spot sources. A mark price is a risk-management price used by many venues for unrealized PnL and liquidation. It need not equal the latest trade.
Funding and arbitrage are the economic link. If a perp persistently trades above its reference market, positive funding commonly makes holding longs less attractive and may reward shorts; the reverse can happen below the reference market. They discourage persistent divergence, not every momentary difference. BitMEX describes funding as tethering its perpetuals to their reference index; Bybit and Hyperliquid publish materially different mark-price constructions. [1] [3] [6]
Five Steps in an Open Position
1. Choose the contract
Read the specification before looking at leverage. First identify the reference market and the contract’s quote and settlement assets. Then check what collateral the venue accepts and how it values that collateral.
- Quantity and multiplier: quantity may mean BTC, quote notional or fixed-value contracts.
- Funding and fees: confirm the interval, current mechanism, limits and maker/taker schedule.
- Risk and execution: check margin mode, maintenance tiers and whether execution uses an order book, AMM, vAMM or pool.
Linear, inverse and quanto products have different payout and collateral behavior. Similarly named BTC perpetuals can therefore be different instruments. [1]
2. Choose long or short exposure
A long gains gross value when the contract price rises; a short gains gross value when it falls. The trader normally owns a position in the derivative, not the underlying BTC. Entry, exit, quantity and direction determine gross PnL. Fees, funding, spread and slippage determine the net result.
3. Post margin and set size
Notional is the market value controlled. Initial margin is capital required to open; maintenance margin is the lower equity requirement that must continue to be met. In isolated margin, a defined allocation supports that position. In cross margin, account equity and other positions can affect its risk. A maximum-leverage control is a limit, not proof of actual leverage: actual leverage changes with notional, allocated margin, collateral value and other exposure.
4. Track funding and prices
Funding is usually a transfer between opposing holders at a timestamp, not a platform trading fee. Under the common sign convention, positive funding means longs pay shorts; negative funding reverses it. Bybit states that pair intervals and limits can differ, while Hyperliquid currently pays hourly and uses an oracle price rather than mark price for its funding notional. [4] [5]
5. Track PnL and liquidation risk
Unrealized PnL is the current valuation of an open position; realized PnL is locked in when quantity is closed. Net PnL also includes trading fees, funding received or paid, spread and slippage. A liquidation calculator is an estimate until it applies the venue’s exact tiers, collateral treatment, funding, buffers and margin mode. Many venues use mark price rather than last price for risk triggers. [2] [7]
The Mathematics Behind a Perpetual Position
The formulas below are a simple linear-contract model, not a universal venue formula. They use base-asset quantity and stable quote collateral. A contract specification can instead use a fixed multiplier or inverse settlement.
Position notional Conceptual linear model
Notional is the current market value of a base-asset quantity.
Nₜ is current notional in quote currency; q is base quantity; Pₜ is current price. For 0.1 BTC at $100,000, Nₜ = 0.1 × 100,000 = $10,000. This convention is common, not universal.
Long and short gross PnL Simplified linear model
s is +1 for a long and −1 for a short; P₀ is entry price. Thus PnLlong = q(Pₜ−P₀), while PnLshort = q(P₀−Pₜ). This is gross PnL: it excludes fees, funding and execution costs.
Effective leverage and return on margin Conceptual
M₀ is margin allocated at entry. With $10,000 notional and $2,000 margin, L = 5. A $300 gross PnL is 15% of posted margin, while the underlying market moved 3%. This is neither the market return nor a promised ROI.
Fees, funding and net PnL Conceptual
Funding received increases net PnL. Spread and slippage are trading outcomes, not fixed platform fees.
Funding and basis Common convention; venue formula varies
Nf is the notional used at the funding timestamp and rf is that interval’s rate. With this sign convention, positive funding produces a negative cash flow for a long and positive for a short. Exact components can include premium, interest, impact prices, caps and time weighting. Hyperliquid’s published formula uses an average premium plus a clamped interest adjustment; BitMEX publishes a different eight-hour TWAP construction. [1] [5]
A positive basis means the perp is above index; a negative basis means below. Funding can influence incentives but does not guarantee instant convergence.
Index, last and mark price Conceptual relationship
This is explanatory, not universal. Last price is the latest execution. Index is a reference basket or oracle. Mark price is a venue-calculated risk price. Bybit may use a median of multiple inputs, while Hyperliquid documents a robust median using oracle, book and external-perp data. [3] [6]
Equity, maintenance margin and a liquidation estimate Simplified model
This is an economic condition, not a venue liquidation formula. Tiers, fees, collateral haircuts, partial liquidation, insurance arrangements and cross-margin equity can change the threshold.
Simplified isolated liquidation derivation
Assumptions: one isolated linear position; stable collateral; no fees, funding, slippage, tier changes, buffer or partial liquidation; constant maintenance rate m.
At P₀ = $100,000, L = 5 and m = 0.005: long ≈ $80,402; short ≈ $119,403. These are simplified educational estimates, not platform liquidation prices.
Linear versus inverse contracts Simplified models
For a linear contract, quote PnL is sq(Pₜ−P₀). In the inverse model, V is contract value in quote units and PnL is in the base asset; quote-currency exposure becomes nonlinear. BitMEX’s contract guide documents distinct inverse and linear payout types. Read the exact multiplier and settlement rules. [1]
Worked Example
Worked example. A trader opens a linear BTC long at $100,000. Position notional is $10,000, quantity is 0.1 BTC, and allocated margin is $2,000. Effective leverage is 5×.
| Move | Market return | Gross PnL | Gross return on margin |
|---|---|---|---|
| Exit at $103,000 | +3% | +$300 | +15% |
| Exit at $97,000 | −3% | −$300 | −15% |
A 0.1 BTC short from $100,000 to $97,000 has the same +$300 gross PnL. These numbers omit costs. At a hypothetical 0.06% entry and exit fee, fees are $12.18: $6.00 on entry plus $6.18 on a $10,300 exit. Funding may be paid or received. The actual net result also depends on execution.
How a Position Ends
A trader can close voluntarily with a market or limit order, reduce part of a position, or use a reduce-only order to avoid reversing direction. Stops and take-profit orders are instructions, not immunity from gaps, liquidity limits or mark-price triggers. A venue may partially liquidate, fully liquidate, delist or discontinue a market, and may have a settlement process where relevant. Hyperliquid, for example, documents book liquidation and partial-liquidation behavior alongside a backstop path; this should not be assumed elsewhere. [7]
What Varies Between Platforms
| Item | Why it matters |
|---|---|
| Quantity and multiplier | Base units, quote notional and fixed contracts produce different PnL conventions. |
| Index and mark methodology | Spot basket, oracle, median, impact price and fallback rules can differ. |
| Funding schedule and formula | Intervals, premium inputs, caps, floors and notional basis are venue-specific. |
| Margin and collateral | Isolated/cross behavior, tiers, haircuts and collateral assets alter risk. |
| Liquidation and settlement | Triggers, buffers, partial close, insurance/ADL and discontinuation procedures differ. |
| Execution model | Order book, AMM, vAMM or pool execution changes spread and slippage behavior. |
Costs and Risks to Check Before Opening
Check maker/taker fees, current funding schedule and rate, index and mark methodology, maintenance tiers, liquidation fees or buffers, available collateral and whether it can lose value or depeg. Review liquidity, spread and slippage at the size you intend to trade. Then check counterparty and operational risk: exchange insolvency, withdrawal restrictions, protocol or smart-contract failure, oracle/index failure, insurance-fund limits, auto-deleveraging, outages and legal availability in your jurisdiction. Use the contract specification and the venue’s live calculator, not a generic formula, before placing an order. See the risk disclosure.
Frequently Asked Questions
Do perpetual futures follow spot prices exactly?
No. They can differ from an index or spot market. Funding and arbitrage aim to reduce persistent divergence; mark-price rules can create another distinct reference.
Can a perpetual position stay open forever?
There is no fixed expiry, but funding, margin requirements, liquidation, venue changes and the trader’s own close order can end it.
Is funding always paid by long traders?
No. Under the common convention, positive funding has longs pay shorts; negative funding reverses that direction.
What causes liquidation?
Liquidation occurs when the relevant equity no longer meets a venue’s maintenance requirement under its own rules, often using mark price rather than last trade.
Why can two exchanges show different liquidation prices?
They can use different margin allocations, tiers, collateral treatment, mark prices, funding treatment, fees and liquidation buffers.
Sources
- Perpetual Contracts Guide — BitMEX. Accessed 3 August 2026.
- Fair Price Marking — BitMEX. Accessed 3 August 2026.
- Mark Price (Perpetual and Expiry Contracts) — Bybit Help Center. Accessed 3 August 2026.
- Funding Fee Calculation — Bybit Help Center. Accessed 3 August 2026.
- Funding — Hyperliquid Docs. Accessed 3 August 2026.
- Robust price indices — Hyperliquid Docs. Accessed 3 August 2026.
- Liquidations — Hyperliquid Docs. Accessed 3 August 2026.
- Introduction to Binance Futures Funding Rates — Binance. Accessed 3 August 2026.
Return to Perpetual Futures Basics or continue with the risk disclosure.