Leverage, funding and liquidation: perpetual futures basics

Most trading volume on crypto exchanges happens not in spot but in perpetual futures. They let you trade with leverage, and for the same reason they can lose money fast for anyone who does not know the rules. Here are the three core ideas with simple examples.

Leverage: a position several times your collateral

Leverage lets you open a position several times the size of your collateral. $1,000 of collateral at 10x is a $10,000 position. If price moves 1% in your favour you make $100, which is 10% of your collateral. It works the same way in reverse: a 1% move against you costs 10% of your collateral.

Liquidation: the forced close

If losses push your collateral below a certain level, the exchange closes your position automatically. That is liquidation. In the example above, a move of about 10% against you wipes out the collateral. Because exchanges keep a “maintenance margin”, liquidation actually happens a bit earlier. The higher the leverage, the smaller the move needed: at 50x, less than 2% can be enough.

Funding: the fee that ties price to spot

Perpetuals never expire, so their price is kept close to spot by regular payments called funding, usually calculated every 8 hours:

• If the perp trades above spot, funding is positive and longs pay shorts.
• If it trades below spot, funding is negative and shorts pay longs.

Funding is paid on the full position size, so on leveraged positions it adds up quickly.

This guide is for information only and is not investment advice. Leveraged trading can lose your entire collateral.