Perpetual contracts (perps) are the most popular derivative in crypto. They let you trade with leverage without expiration dates. But leverage is a double-edged sword — it amplifies both gains and losses.

Most traders understand leverage conceptually but don't understand the mechanics. This guide covers everything you need to know about perpetual contracts — from basic concepts to advanced risk management.

What are perpetual contracts?

Perpetual contracts are derivatives that track the price of an underlying asset (like BTC or ETH) but never expire. Unlike futures, there's no settlement date. You can hold a position indefinitely.

Perps use a funding mechanism to keep the contract price close to the spot price. Every 8 hours, funding is exchanged between longs and shorts based on the funding rate.

Understanding leverage

What leverage means

Leverage lets you control a larger position than your capital would normally allow. 10x leverage means $1,000 controls $10,000 of exposure.

Your profits and losses are calculated on the full position size, not your margin. This is why leverage amplifies both gains and losses. A 5% move on a 10x leveraged position is a 50% move on your margin.

Leverage example

You have $1,000 and use 10x leverage to open a $10,000 long position on BTC at $50,000:

• Position size: $10,000 (0.2 BTC)
• Margin required: $1,000
• If price goes to $52,500 (+5%): Position worth $10,500, profit = $500 (50% of margin)
• If price goes to $47,500 (-5%): Position worth $9,500, loss = $500 (50% of margin)

Notice how a 5% price move becomes a 50% move on your margin. This is the power and danger of leverage.

Common leverage levels

• 2-3x: Conservative. Good for beginners. Wide liquidation buffer.
• 5-10x: Moderate. Most common for experienced traders.
• 20-50x: Aggressive. Requires precise risk management.
• 100x+: Extremely risky. Not recommended for most traders.

Margin explained

Types of margin

Margin is the collateral you put up to open a leveraged position. There are several types:

• Initial margin: What you need to open the position. For 10x leverage, this is typically 10% of the position size (plus a small buffer for fees).
• Maintenance margin: The minimum required to keep the position open. This is usually 0.5-2% of the position size, depending on the exchange.
• Isolated margin: Margin allocated to a specific position. If that position is liquidated, only that margin is lost.
• Cross margin: Margin shared across all positions. One position can use margin from another, but liquidation risk is shared.

How margin works

As your position moves against you, your margin decreases. If it falls below the maintenance requirement, you get liquidated.

Example: You open a $10,000 position with $1,000 margin (10x leverage). If price moves 5% against you, you lose $500. Your remaining margin is $500. If maintenance margin is 1% ($100), you still have $400 buffer. But if price moves another 4% against you, you're liquidated.

Margin ratio

Margin ratio = (Margin / Position Value) × 100%

When your margin ratio falls below the maintenance margin requirement, liquidation occurs. Most exchanges show your margin ratio in real-time. Keep it well above the maintenance level.

Liquidation mechanics

When liquidation happens

If your position loses enough that your remaining margin falls below the maintenance requirement, you get liquidated. The exchange closes your position to prevent further losses.

Liquidation is automatic and immediate. You don't get a warning. Once your margin ratio hits the maintenance level, your position is closed at the liquidation price.

Liquidation price calculation

Liquidation price depends on:

• Entry price: Where you opened the position
• Leverage: Higher leverage = closer liquidation
• Position side: Long or short (opposite directions)
• Maintenance margin: Exchange-specific (typically 0.5-2%)
• Trading fees: Which reduce your margin

Liquidation math

For a long position with 10x leverage and 0.5% maintenance margin:

• Initial margin: 10% of position value
• Liquidation occurs when margin = 0.5% of position value
• You can lose 9.5% of your margin before liquidation
• Price needs to drop ~9.5% from entry (accounting for fees)

For a short position with 10x leverage:

• Liquidation occurs when price rises ~9.5% from entry
• Same math, opposite direction

Liquidation by leverage

Higher leverage = closer liquidation = less room for error:

• 5x leverage: Liquidation at ~19% adverse move
• 10x leverage: Liquidation at ~9.5% adverse move
• 20x leverage: Liquidation at ~4.5% adverse move
• 50x leverage: Liquidation at ~1.5% adverse move
• 100x leverage: Liquidation at ~0.5% adverse move

This is why high leverage is dangerous. A small adverse move can wipe you out.

Funding rates

What are funding rates?

Perpetual contracts use funding rates to keep the contract price close to the spot price. Every 8 hours, funding is exchanged between longs and shorts.

If the perpetual price is above spot, longs pay shorts (positive funding). If the perpetual price is below spot, shorts pay longs (negative funding).

How funding works

Funding rate = (Perpetual Price - Spot Price) / Spot Price

Funding is paid every 8 hours at 00:00, 08:00, and 16:00 UTC. The rate can change between funding periods.

Example: You hold a $10,000 long position with -0.1% funding (you pay):

• Funding payment: $10,000 × 0.001 = $10 every 8 hours
• Daily cost: $30 (3 payments)
• Weekly cost: $210
• Monthly cost: ~$900 (2.1% of position value)

Funding rate ranges

Funding rates typically range from -0.1% to +0.1% per 8 hours, but can spike during extreme market conditions:

• Normal conditions: 0.01-0.05% per 8 hours
• High volatility: 0.05-0.1% per 8 hours
• Extreme conditions: Can exceed 0.5% per 8 hours

Impact on positions

Funding rates can significantly impact long-term positions:

• Short-term (days): Usually negligible (0.1-0.3% total)
• Medium-term (weeks): Can be meaningful (1-3% total)
• Long-term (months): Can be substantial (3-10% total)

For grid strategies and long-term holds, funding costs must be factored into profitability calculations.

Common mistakes

Mistake 1: Not calculating liquidation price

Mistake 2: Ignoring funding costs

Funding rates can eat into profits or amplify losses. A position that looks profitable on paper might be unprofitable after funding costs.

Solution: Account for funding rates in your calculations. Use our Funding Rate Impact Tool to see how funding affects your position over time.

Mistake 3: Using maximum leverage

Just because you can use 100x leverage doesn't mean you should. Higher leverage = less margin for error. A 1% adverse move at 100x leverage wipes you out.

Solution: Use leverage conservatively. 3-5x is often enough. Only use higher leverage if you have a clear edge and precise risk management.

Mistake 4: Not accounting for fees

Trading fees reduce your margin. A 0.1% fee on entry and exit is 0.2% of your position value. This reduces your liquidation buffer.

Solution: Factor fees into your calculations. Add 0.1-0.2% to your expected liquidation distance to account for fees.

Mistake 5: Setting stops too close to liquidation

If your stop loss is only 0.5% above your liquidation price, a small gap or slippage can cause liquidation instead of your stop.

Solution: Set stop losses well above liquidation price. At least 1-2% buffer for normal volatility, more for volatile assets.

Mistake 6: Not monitoring margin ratio

Many traders open positions and forget about them. If price moves against you, your margin ratio decreases. If you don't monitor it, you might get liquidated unexpectedly.

Solution: Monitor your margin ratio regularly. Set alerts if your exchange supports them. Don't let it get too close to maintenance.

Best practices

Real-world examples

Key takeaways

Frequently asked questions

What's the difference between isolated and cross margin?

Isolated margin is allocated to a specific position. If that position is liquidated, only that margin is lost. Cross margin is shared across all positions. One position can use margin from another, but liquidation risk is shared. Use isolated margin when learning or testing strategies.

Can I get liquidated if price moves in my favor?

No. Liquidation only happens when price moves against you. For longs, liquidation occurs when price drops. For shorts, liquidation occurs when price rises.

What happens to my position if funding is very high?

High funding rates (0.5%+ per 8 hours) can quickly eat into profits or amplify losses. If you're long and funding is 0.5% per 8 hours, you pay 1.5% daily. Over a week, that's 10.5% of your position value — even if price doesn't move.

Should I use leverage for grid trading?

Leverage with grids can be dangerous because you're already accumulating a large position. If you use leverage, use it conservatively (2-3x max) and account for funding costs. Grids already have high exposure — adding leverage amplifies that risk.

How do I calculate my exact liquidation price?

Use our Liquidation Distance Tool. It accounts for entry price, leverage, position side, maintenance margin, and fees to give you the exact liquidation price.

What if price gaps through my liquidation price?

If price gaps through your liquidation price, you'll be liquidated at the liquidation price, not the gap price. However, if the gap is very large, you might face additional losses from the liquidation process itself (liquidation fees, etc.).

Can funding rates be negative?

Yes. If funding is negative and you're long, you receive funding (shorts pay you). If you're short, you pay funding. Negative funding is favorable for longs and unfavorable for shorts.

How often do funding rates change?

Funding rates are calculated every 8 hours and can change between periods. They're based on the difference between perpetual and spot prices. High volatility or large price differences can cause funding rates to spike.

What's the safest leverage to use?

There's no universal answer, but 3-5x leverage is generally considered safe for most traders. It provides enough amplification without excessive liquidation risk. Higher leverage should only be used by experienced traders with precise risk management.

Tools to help

Use our Liquidation Distance Tool to calculate exactly where you'll get liquidated. Our Funding Rate Impact Tool shows how funding costs affect your position over time, and our Time-to-Liquidation Visualizer helps you understand how price movement and funding reduce margin over time.