10. Crypto and prediction markets

Perpetual futures, funding and open interest (PERP)

A perpetual future never expires and is kept close to its underlying by a periodic funding payment, and PERP shows a market's funding, open interest and premium over time.

  • 4 min
  • 3 questions
  • Lesson 2 of 4

Why you would care

How crowded and how expensive is the leveraged bet on this asset? Most crypto trading volume happens in perpetual futures, not in the coins themselves, and with leverage. When funding is very positive and open interest climbs, many traders are long on borrowed money: a fall can trigger a cascade of forced selling. Funding and open interest are the crowd's leverage gauge.

The idea from scratch

No expiry, so how does it track the price?

A normal future ends on a date and converges to the spot price (chapter 07). A perpetual never ends. Instead, every few hours longs and shorts exchange a funding payment:

  • If the perpetual trades above the underlying (more eager buyers), longs pay shorts: positive funding. That makes being long costly and pulls the price down.
  • If it trades below, shorts pay longs: negative funding.

Open interest

Open interest (OI) = the value of all open perpetual positions (chapter 06). Rising OI with rising prices means new money is opening longs; falling OI means positions are closing.

Premium

Premium = perpetual price / underlying (oracle or reference) price - 1. Positive premium means the perpetual trades rich. For stock perpetuals, which trade even when the stock market is closed, the premium against the stock's last price is an early read of weekend sentiment.

Liquidations

Because positions use leverage, a sharp move forces exchanges to close losing positions automatically (liquidations), which can push the price further: a cascade.

Diagram: Perpetual price leads to vs underlying; vs underlying leads to Positive funding: longs pay shorts (above); vs underlying leads to Negative funding: shorts pay longs (below); Open interest rising leads to More leverage in the market; More leverage in the market leads to Risk of liquidation cascades.
Wide diagram: scroll sideways to see all of it.

See it in Gloom

open ittype PERP BTC, PERP TSLA (a stock perpetual) or PERP alone. Tabs: History, Evidence. Keys: a alert, e evidence, d description, f financials, g graph, / search.

What you read in History:

  1. Funding: the rate paid each interval, shown as a percentage, with an 8-hour equivalent and a simple yearly rate (APR).
  2. Open interest: in coins and in dollars, with 1-hour and 24-hour changes measured on the number of coins (so price moves do not fake an open-interest surge).
  3. Premium: mark price versus the reference (oracle) price; for stock perpetuals, versus the stock's last price, including while the stock market is closed.
  4. Windows: 1D, 7D, 30D, 90D, 365D, with hourly candles.

a sets an alert on funding, a 24-hour open-interest change, or the premium crossing a threshold.

Trading perpetuals (not covered)

A separate plugin for one decentralized perpetuals venue, with its own boards and order entry, is still in testing. This Academy does not cover it or teach order entry.

Practice and recap

Try it3 tasks
  1. Funding +0.03% per 8 hours: simple yearly rate? (0.03% x 3 x 365 ≈ 33%.)
  2. Price up 10%, open interest up 40%: what happened? (Lots of new leveraged positions opened, mostly longs if funding rose.)
  3. A stock perpetual trades 2% above the stock's Friday close on Sunday. What might it signal? (Traders expect the stock to open higher on Monday.)
Common mistakes4 mistakes
  • Treating funding as a guaranteed yield; it changes every interval.
  • Reading dollar open interest changes that are only price moves.
  • Ignoring liquidation risk with leverage.
  • Confusing a perpetual's mark price with the underlying's price.
Check yourself3 questions
  1. What keeps a perpetual's price near the underlying?
  2. Who pays when funding is positive?
  3. What is a liquidation?
Answers
  1. The funding payment between longs and shorts.
  2. Longs pay shorts.
  3. A forced close of a leveraged position whose losses have used up its margin.
Words in this lesson7 words
perpetual future
A futures contract with no expiry.
funding rate
The periodic payment between longs and shorts.
open interest
The value of all open positions.
premium (perpetual)
Perpetual price vs the underlying's price.
oracle price
The reference price a venue uses for the underlying.
liquidation
A forced close of a losing leveraged position.
APR
A simple yearly rate, not compounded.

Educational material about reading market data, not investment advice.