Perpetual futures: funding, leverage and the liquidation price
A perpetual has no expiry, so a funding payment keeps it tethered to spot. Worked through, funding of 0.01% every eight hours is nearly 110% a year against your margin at 10x — and liquidation arrives after a 9.5% move.
Not financial advice. This article is for informational purposes only.
The short version
A perpetual future never expires, so instead of settling at maturity it uses a periodic funding payment between longs and shorts to hold it near the spot price. Leverage sets how far price can move before you are liquidated: at 10x that is roughly 9.5%, at 25x roughly 3.5%. Funding looks trivial per payment and is not — 0.01% every eight hours is about 11% a year on notional, which at 10x is nearly 110% a year against your margin.
Perpetual futures are the highest-volume instrument in crypto, and they are structurally unlike anything in traditional markets. Two mechanisms — funding and liquidation — determine essentially everything about how they behave. Both are arithmetic.
Why “perpetual” required inventing something
A conventional future has an expiry date, and that date does the work of keeping it honest: at settlement the contract must converge on the spot price, because it settles against it. Arbitrage enforces convergence in advance.
Remove the expiry and you remove the anchor. A perpetual could drift arbitrarily far from spot with nothing to pull it back. The solution is the funding rate: a payment made directly between holders of long and short positions at regular intervals, commonly every eight hours.
The direction follows the deviation. If the perpetual trades above spot, longs pay shorts — being long becomes expensive and being short is paid, which pushes the price back down. If it trades below spot, shorts pay longs. The exchange is not a party to this; it moves between users.
Funding: small numbers, large annualised cost
Funding rates are quoted per interval, which makes them look negligible. Annualise them and the picture changes completely. With three payments a day:
| Funding per 8h | Per day | Per year on notional | Per year on margin at 10x |
|---|---|---|---|
| 0.01% (typical) | 0.03% | 10.95% | 109.5% |
| 0.05% | 0.15% | 54.75% | 547.5% |
| 0.10% | 0.30% | 109.5% | 1,095% |
The final column is the one that matters and the one nobody quotes. Funding is charged on your position’s notional value, not on the margin you posted. At 10x leverage your notional is ten times your margin, so the cost relative to the capital actually at risk is ten times the headline rate.
The first row is an ordinary, unremarkable funding rate. Held for a year at 10x it costs more than your entire margin. This is why perpetuals are instruments for short holding periods, and why using one as a substitute for owning the asset is expensive in a way that is easy to miss — the payments are small, frequent, and never appear as a single alarming number.
Funding also tells you something. Persistently positive funding means the market is crowded long, and crowded positioning is what makes liquidation cascades possible. It is a positioning gauge, not a directional signal.
Leverage: what the multiple actually buys
Leverage means posting margin worth a fraction of the position. At 10x, 1,000 of margin controls 10,000 of exposure. Gains and losses accrue on the 10,000.
The consequence people underestimate is not the amplification — that part is obvious — but how little room remains:
| Leverage | Initial margin | Adverse move to roughly liquidate |
|---|---|---|
| 2x | 50% | ~49% |
| 5x | 20% | ~19% |
| 10x | 10% | ~9.5% |
| 25x | 4% | ~3.5% |
| 50x | 2% | ~1.5% |
| 100x | 1% | ~0.5% |
The arithmetic is simply the initial margin percentage minus the maintenance margin the venue requires. Set that against reality: bitcoin routinely moves several percent in a day. At 25x, an ordinary session is enough. At 100x, ordinary noise — a spread widening, a brief wick — will do it. High leverage does not increase your expected return; it increases the probability that ordinary volatility removes you before your idea has had time to be right or wrong.
Liquidation: how the position actually ends
Your position is closed when equity falls to the maintenance margin. Three details decide how much you lose.
The liquidation price is computed from a mark price, not the last trade. Venues use an index across several spot markets specifically so a single venue’s wick cannot trigger liquidations. This protects you, and it means your liquidation level may not correspond to any price you saw printed.
Liquidation is a market order. It closes at whatever the book offers. In a fast move that is meaningfully worse than the liquidation price, which is why realised losses often exceed the calculation.
Isolated versus cross margin changes what is at stake. Isolated margin risks only what you assigned to that position. Cross margin uses your whole account balance as collateral — which delays liquidation but puts everything behind one trade. Choosing cross margin without understanding this is a common and expensive mistake.
Venues also maintain an insurance fund for cases where a liquidation closes worse than bankruptcy price, and some operate auto-deleveraging that can close profitable opposing positions when that fund is exhausted. It is rare. It is not impossible, and it means an extreme event can affect you even when your own position was fine.
The cascade, which is the whole risk picture
Put the pieces together. Leverage concentrates liquidation prices at predictable levels. Price reaching one triggers forced market selling. That selling pushes price to the next cluster. Each stage feeds the next, and the mechanism requires no manipulation — just crowded positioning and a starting push.
This is why the largest single-day moves in crypto tend to be liquidation events rather than news events, and why they so often retrace substantially within a day. Nothing changed about the asset; positions were removed.
The honest summary
Perpetuals are well-engineered instruments that do exactly what they say. They are also the fastest route to total loss available in this market, because funding erodes a position quietly while leverage removes the room to be temporarily wrong.
If you use them, know your liquidation price before you open, size from that rather than from conviction — our position size calculator does the arithmetic, and how to size a crypto position explains the reasoning — and annualise the funding rate before assuming it is trivial. Nothing here is a recommendation to trade these; total loss is a realistic outcome. See our disclaimer.
Key takeaways
- Perpetuals have no expiry, so a periodic funding payment between longs and shorts holds them near spot.
- Funding is charged on notional, not margin — so at 10x the cost against your capital is ten times the headline rate.
- A typical 0.01% per eight hours is about 11% a year on notional, and nearly 110% a year against margin at 10x.
- Liquidation arrives after roughly a 9.5% adverse move at 10x, 3.5% at 25x and 0.5% at 100x.
- The liquidation price uses an index mark price, so it may not match any price you saw printed.
- Liquidation executes as a market order, so realised losses frequently exceed the calculated level.
- Cross margin puts your entire balance behind one position. Isolated margin risks only what you assigned.