What are perpetual swap contracts and how do funding rates work?
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3 Answers
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Perpetual swap contracts are crypto futures that don’t expire. They track the spot price and use a funding mechanism to keep the contract price close to the index. Traders pay or receive funding on a regular cycle (commonly every 8 hours) depending on whether the contract trades above or below the index. The funding rate can be positive or negative and changes with demand.
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On a real trade, I learned funding can eat into profits fast. I once held a long BTC perpetual while funding stayed positive for several cycles, and those tiny payments stacked up. By the time I closed, a chunk was gone even though the spot hadn’t moved much. Now I always check the funding rate before entering and again before holding overnight. If I’m not prepared for the expected payments, I scale down or hedge with a small short. I also set a hard profit target and a time cap, because funding can swing faster than price moves. Keep it simple: know the cycle, monitor the rate, and don’t overextend on leverage.
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Perpetuals stay close to spot via periodic funding; rates flip between paying and receiving, incentivizing price alignment and creating carry costs.
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