Module 7: Perpetual Futures
Why Derivatives Exist
Chapter 1 of 14 · about 6 minutes
1.1 The bigger market
Mint had always assumed that crypto prices were set by people buying and selling actual coins. Then Hash showed a chart comparing daily trading volume in Bitcoin spot markets with volume in Bitcoin perpetual futures.
The futures volume was several times larger.
"Most of the trading isn't in bitcoin at all?" said Mint.
"Most of the trading is in contracts that track bitcoin's price," said Hash. "If you want to understand why crypto prices move the way they do, especially the sudden crashes and squeezes, you have to understand derivatives. This module is about the most important one in crypto: the perpetual future."
1.2 What a derivative is
A derivative is a contract whose value is derived from something else, called the underlying asset. You don't own the underlying asset. You own a contract that gains or loses value as the asset's price moves.
Think of a bet with a friend on tomorrow's temperature. Neither of you owns the weather. But your bet's outcome depends entirely on it. A derivative is a structured, tradable version of that idea.
| Spot market | Derivatives market | |
|---|---|---|
| What you trade | The actual asset, like BTC | A contract based on the asset's price |
| Ownership | You own the asset | You own a contract |
| Can you withdraw the asset? | Yes | No, you settle gains and losses |
| Leverage | Usually none, unless borrowing | Usually built in |
| Can you profit from falling prices? | Only by selling what you hold | Yes, by opening a short position |
1.3 Three reasons people use derivatives
1. Hedging. Protecting against price moves. A Bitcoin miner earning BTC every day might worry about the price falling before they can pay their electricity bills. By taking a position that gains if the price falls, they can reduce that risk. Chapter 12 covers hedging in detail.
2. Speculation. Betting on price direction. Derivatives let traders bet on rises (going long) or falls (going short), often with leverage.
3. Capital efficiency. Gaining exposure with less capital. With leverage, a trader can control a $10,000 position with $1,000 of collateral, leaving the rest of their capital free for other uses. This is powerful, and, as you'll see, dangerous.
1.4 Long and short
Two words appear constantly in this module.
Long means you profit if the price rises. Short means you profit if the price falls.
| Long | Short | |
|---|---|---|
| Profits when | Price rises | Price falls |
| Loses when | Price falls | Price rises |
| Example | Open a long at $100,000, close at $105,000: profit | Open a short at $100,000, close at $95,000: profit |
In spot markets, shorting is complicated: you'd need to borrow the asset, sell it, and buy it back later. In derivatives, opening a short is as simple as opening a long.
"So I can make money when crypto crashes?" Mint asked.
"You can," said Hash. "And you can lose money when it rallies. Shorts have a particular danger: in theory, a price can rise without limit, so a short position's potential loss has no natural ceiling. Leverage and liquidation rules limit it in practice, but it's worth knowing."
1.5 Every trade has two sides
Derivatives are a zero-sum game between traders, before fees. For every long position, there's a short position of exactly the same size. When longs make money, shorts lose the same amount, and vice versa.
Once you include trading fees, liquidation fees, and spreads, the game becomes slightly negative-sum for traders as a group. The exchange earns fees regardless of who wins. Funding (Chapter 7) is a transfer between traders, not a cost paid to the exchange, so it doesn't change the total.
This matters because it means every derivatives trade is a contest against another trader, often a professional or a bot (Module 1, Chapter 9). Unlike holding spot BTC over many years, where the whole market can rise together, derivatives profits always come from someone else's losses.
1.6 Types of crypto derivatives
| Derivative | What it is | Covered in |
|---|---|---|
| Futures with expiry | Contracts to buy or sell at a set price on a set date | Chapter 2 |
| Perpetual futures (perps) | Futures that never expire, kept close to spot by funding | Chapters 3 to 14 |
| Options | Contracts giving the right, but not obligation, to buy or sell at a set price | The Crypto Options module |
| Leveraged tokens and other products | Packaged products with built-in leverage | Not covered in depth |
Perpetual futures are by far the most traded crypto derivative. They were popularised by crypto exchanges and have since spread far beyond crypto, which is why most of this module focuses on them.
1.7 Why derivatives move spot prices
Derivatives don't just track spot prices. They influence them.
Arbitrage links them. If perp prices move away from spot, arbitrageurs trade between the two, pulling them back together (Module 1, Chapter 6).
Liquidations force trades. When leveraged positions are liquidated, the exchange closes them by trading in the market, creating sudden waves of buying or selling (Chapter 8).
Positioning creates fragility. When many traders are leveraged on one side, the market becomes vulnerable to sharp moves against them (Module 4, Chapter 15).
"So the derivatives tail can wag the spot dog," said Node.
"Often," said Hash. "Many of crypto's most violent moves start in derivatives markets."
1.8 The honest warning
Before going further, Hash wanted Mint and Node to hear one thing clearly.
"Derivatives with leverage are where most retail traders lose the most money in crypto. Not because the concepts are impossible, but because leverage magnifies every mistake, and liquidation makes losses final. This module will teach you how they work in detail. Understanding them is valuable even if you never trade them, because they shape the whole market. If you do trade them, the final chapter is the most important one."
In several countries, crypto derivatives are restricted or unavailable to retail traders, precisely because of these risks (Module 1, Chapter 14). Check your local rules.
This module is educational and is not trading advice.
1.9 Try it yourself
Find a data source that compares spot and derivatives trading volume for Bitcoin across major exchanges. Note the ratio between them over the past month. Then find Bitcoin's total open interest in perpetual futures, and compare it with the value of BTC held on exchanges.
Key takeaways from this chapter
- A derivative is a contract whose value depends on an underlying asset, without owning that asset.
- People use derivatives for hedging, speculation, and capital efficiency.
- Long positions profit from rising prices; short positions profit from falling prices.
- Derivatives are zero-sum between traders before costs, and negative-sum after fees, liquidation fees, and spreads; funding is a transfer between traders, not a cost.
- Perpetual futures are the most traded crypto derivative, often exceeding spot volume.
- Derivatives influence spot prices through arbitrage, liquidations, and crowded positioning.
- Leverage magnifies mistakes. Understand derivatives fully before trading them, and check local rules.