Are you curious about how traders can hold a position on an index like the VIX without ever having to roll over contracts? This article explains the mechanics of perpetual swaps, why a funding rate is needed, and what you should watch for if you consider using them to earn or hedge.
What a perpetual swap actually is
A perpetual swap is a type of derivative contract that mimics the price movement of an underlying asset—such as a stock index, commodity, or cryptocurrency—without an expiration date. Unlike traditional futures, which settle on a set date and require traders to roll over to a new contract to stay exposed, a perpetual swap can be held indefinitely.
Because there is no expiry, the contract price could drift away from the spot price of the underlying index. To keep the two prices aligned, perpetual swaps use a funding rate. This is a periodic payment exchanged between long (buyers) and short (sellers) positions. If the swap trades above the spot price, longs pay shorts; if it trades below, shorts pay longs. The rate is calculated based on the difference between the swap price and a reference spot price, often using an interest‑rate component and a premium/discount component.
The funding mechanism incentivizes traders to push the swap price back toward the spot price, creating a self‑balancing system. The payment usually occurs every few hours and can be positive or negative, depending on market conditions.
Real‑world illustration
In March 2026, Cboe announced plans to create a “never‑ending” VIX product by converting the volatility index into a perpetual swap. The goal is to let traders focus solely on the direction of the VIX without worrying about contract expiries or decay. The announcement referenced existing crypto‑exchange products, such as Gate’s VIX/USDT perpetuals and Hyperliquid’s Bitcoin‑VIX futures, noting that these markets are still thinly traded.
Analysts highlighted that, even though a perpetual swap removes the need to roll contracts, funding payments and “basis risk” (the risk that the swap price diverges from the true spot index) remain. Because the VIX is a calculated index rather than a tradable asset, market makers cannot simply buy the spot to hedge, which adds complexity to pricing the funding rate.
What this means for you
If you are looking to earn passive income or hedge exposure to volatility, perpetual swaps offer a way to stay continuously invested without the operational hassle of rolling futures. However, the funding rate can turn a seemingly neutral position into a cost or a small income stream, depending on market sentiment.
Because the VIX and similar indexes cannot be owned directly, the funding rate may be higher than for assets that have a physical or on‑chain counterpart. This can erode returns over time, especially in low‑volatility periods when funding rates tend to be negative for longs.
Liquidity is another practical concern. Thin markets mean wider bid‑ask spreads, which can increase the cost of entering and exiting a position. In the case of VIX perpetuals, the limited volume reported on crypto exchanges suggests that price slippage could be significant for larger trades.
How to evaluate a perpetual swap before you trade
- Funding rate history: Look at the recent funding payments on the contract. Consistently high positive or negative rates indicate that one side is paying the other a lot, which can affect profitability.
- Liquidity and spread: Check the order book depth and the average spread between the best bid and ask. Higher liquidity reduces slippage.
- Basis risk: Compare the perpetual price to the actual spot index (or a reliable proxy). Large, persistent gaps suggest higher hedging costs for market makers, which may be passed on to traders.
- Leverage options: Some platforms allow you to trade with leverage. Higher leverage amplifies both gains and funding costs, so assess your risk tolerance carefully.
- Counterparty and platform risk: Ensure the exchange has a solid reputation, transparent funding calculations, and adequate insurance or reserve mechanisms.
FAQ
Why do perpetual swaps need a funding rate if they never expire?
The funding rate bridges the price gap between the perpetual contract and the underlying spot index. Without it, the contract could drift far from the spot price, making it a poor proxy for the asset’s true value.
Can I earn money just from the funding payments?
Potentially, if you hold the side of the contract that receives funding (e.g., being short when the funding rate is positive). However, funding rates fluctuate, and you also face market risk, so relying solely on funding income is risky.
Is a perpetual swap the same as a traditional futures contract?
No. Futures have a fixed expiration date and settle at that time, requiring you to roll over to maintain exposure. Perpetual swaps have no expiry, but they incorporate funding payments to keep the price aligned with the spot.
What happens if the underlying index, like the VIX, cannot be bought directly?
Market makers cannot hedge by buying the spot asset, so they may price in additional risk premiums. This often results in higher funding rates and greater basis risk for traders.
This article references reporting from coindesk.com.
