# What are Perpetual Futures or **"Perps"**
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#### Introduction: 
***Economist Robert Shiller first proposed the concept of perpetual futures in 1993, but the financial technology was first implemented for cryptocurrency trading by co-founder Arthur Hayes and his team at the BitMEX exchange in 2016.*** 
## The concept and its crypto application
### Initial theory: 
*Shiller proposed perpetual futures as a financial tool to create derivatives markets for illiquid, hard-to-value assets, such as real estate or labor income.*
### Crypto implementation: 
*Legendary options trader Arthur Hayes, the first billionaire Cryptocurrency Options Trader,  and his team at BitMEX adapted this theoretical instrument to the crypto market.* - In May 2016, they introduced the XBTUSD perpetual swap, a futures-like contract that could be held indefinitely instead of expiring monthly. 
## How BitMEX innovated the contract
- BitMEX's version of the perpetual future contract became widely adopted by other crypto exchanges due to its specific mechanics. 
#### Funding payments: 
- To prevent the perpetual contract's price from diverging significantly from the spot price of the underlying asset (like Bitcoin), BitMEX implemented a "funding rate." This mechanism involves periodic payments between traders holding long and short positions to keep the contract price tethered to the spot price.
#### High leverage: 
- The contracts also broke new ground by allowing for extremely high leverage, up to 100x, which created significant opportunities for traders.
#### Impact: 
- This innovation eliminated the need for traders to roll over contracts monthly and made perpetual futures the most traded financial instrument in the crypto market today. 
## Funding Rate

***The funding rate is a unique mechanism in perpetual futures that serves to keep the contract's price closely aligned with the underlying asset's spot price.***

***Unlike traditional futures, which naturally converge to the spot price on their expiration date, perpetual futures never expire, so a system is needed to prevent the futures and spot prices from diverging significantly.***
 
### Here is how the funding rate mechanism works: 
#### The core purpose
- *The funding rate creates a regular, periodic payment between traders holding long and short positions to balance market sentiment.* 
- *This payment incentivizes market participants to push the perpetual contract's price toward the spot price, or index price, of the underlying asset.* 
- *It is not a fee paid to the exchange; rather, it is a direct transfer between traders.* 
#### Positive funding rate
- *A positive funding rate occurs when the perpetual futures price is trading above the spot price.* ***Contango*** 
- * This situation, known as contango, indicates that bullish sentiment is prevalent, and more traders are taking long positions.* 
#### The payment: 
- *Traders holding long positions must pay a fee to traders holding short positions.*
#### The incentive: 
- This dynamic makes it more expensive to hold a long position and more profitable to hold a short position. 
- As a result, it encourages sellers to enter the market and pushes the futures price back down toward the spot price. 
#### Negative funding rate
- A negative funding rate occurs when the perpetual futures price is trading below the spot price. ***Backwardation***
- This is known as backwardation, and it signifies that bearish sentiment is strong, with more traders holding short positions. 
#### The payment: 
- Traders holding short positions must pay a fee to traders holding long positions.
#### The incentive: 
- This makes it more expensive to hold a short position, encouraging traders to close their shorts or open long positions, which pushes the perpetual contract's price back up toward the spot price. 
## How the rate is calculated
- While the exact formula can vary by exchange, it is generally based on two components: the premium index and an interest rate. 
#### Premium index: 
- Measures the difference between the perpetual contract's price and the underlying asset's spot price. 
- It is the primary driver of whether the rate is positive or negative.
#### Interest rate: 
- A fixed rate determined by the exchange. 
- The formula may include a clamping function to prevent extreme spikes in the funding rate, ensuring a more stable and predictable environment for traders. 
#### Impact on traders
- For traders, the funding rate is an important factor to consider for their overall profitability, especially for high-leverage positions held over an extended period. 
#### For long-term holders: 
- A consistently positive funding rate can significantly erode profits for a long position, while a negative rate can add to the profitability of a short position.
#### For market analysts: 
- The funding rate can act as a barometer for market sentiment, as extreme positive or negative rates can signal an over-leveraged market or impending short squeeze.
#### For arbitrageurs: 
- Traders can employ a delta-neutral strategy, or "cash and carry," to profit from the funding rate. 
- For example, if the funding rate is positive, a trader can buy the spot asset while simultaneously shorting the perpetual futures contract. 
- They collect the funding payments while remaining insulated from price volatility. 
 
- Learn as much as you can and consider paper trading until you are confident you can win.
- Only trade what you can afford to lose.
-Remember you wins are yours and your losses are yours. Take full responsibility for your actions.


# ***The End***
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