There’s a quiet toll booth on the highway of leveraged crypto trading, and most retail investors don’t even notice they’re paying it. The Economist published a deep dive into perpetual futures contracts, revealing that positive funding rates can siphon off more than 10% of a long position’s notional value over the course of a year.

How the funding rate machine works

Perpetual futures are exactly what they sound like: futures contracts with no expiration date. Traditional futures expire monthly or quarterly, forcing traders to roll positions and giving the market natural reset points. Perpetuals skip all that, letting you hold a leveraged bet indefinitely.

The catch is the funding rate mechanism. When the perpetual futures price trades above the spot price, long holders pay short holders a fee. This payment typically occurs every eight hours on major platforms.

Three payments a day, every day, for as long as you hold the position. The Economist notes that while negative funding rates do occur, the skew is overwhelmingly toward positive rates, disproportionately punishing long holders during exactly the kind of bullish conditions that attract retail traders in the first place.

From academic paper to crypto casino to your brokerage

The intellectual origins of perpetual futures trace back to economist Robert Shiller, who proposed the concept in the early 1990s as a way to create liquid markets for assets that were difficult to trade.

BitMEX launched its XBTUSD perpetual contract on May 13, 2016, becoming the first prominent implementation in the crypto space. Traders could take leveraged positions, often between 10x and 100x, on Bitcoin without worrying about contract rollovers or expiration dates.

Now the concept is migrating beyond crypto’s borders. The Economist highlights how perpetual futures are being explored for share indices, commodities, and other mainstream financial instruments. Platforms like Robinhood have signaled interest in integrating perpetual futures into their offerings, which would put these products directly in front of the same retail audience that drove the meme stock saga.

What this means for traders and the broader market

The 10% annual drag from funding rates changes the calculus for anyone treating perpetual futures as a substitute for spot exposure. If you’re simply bullish on Bitcoin and want to express that view, buying spot gives you clean upside exposure. Opening a long perpetual position gives you that same exposure minus a persistent bleed that can easily eat into double-digit percentages of your capital annually.

The math gets uglier with leverage. A trader running a 10x long position isn’t just paying funding on their collateral. They’re paying it on the full notional value of the position. That means the effective cost relative to actual capital deployed is multiplied by the leverage factor. A 10% annual funding cost on notional becomes a 100% cost relative to the margin posted on a 10x position.

The concern is that the funding rate mechanism creates a hidden, compounding cost that is structurally difficult for retail participants to appreciate, especially when the product is marketed alongside simpler instruments like stocks and ETFs. A 10% annual drain doesn’t show up as a line item on a trade confirmation. It accumulates silently, spread across 1,095 eight-hour intervals, each one small enough to ignore individually but devastating in aggregate.