Perpetual futures, commonly known as “perps” in the crypto world, have revolutionized digital asset trading. These innovative financial instruments have quickly become the dominant force in cryptocurrency markets, offering traders unprecedented flexibility and opportunities.
Here’s why perps are making waves in the crypto space:
- Significant market dominance: Bitcoin perpetual futures reached an average daily volume of $57.7 billion on weekdays in Q1 2024, substantially exceeding the $18.8 billion in spot trading. This difference demonstrates the growing preference for perps among traders.
- Efficient leverage access: Perps provide streamlined access to leverage without the rollover costs associated with traditional fixed-term futures, making them attractive for both speculative and hedging strategies.
- Advanced funding mechanics: The funding rate mechanism allows perps to track spot prices with precision. This system creates a self-balancing market where long and short position holders periodically exchange payments.
- Market sentiment insights: Funding rates serve as indicators for market sentiment and leverage. While not leading indicators for price movements, persistently high funding rates may signal periods of increased volatility.
- Structural positive skew: Funding rates tend to skew positive due to built-in base interest rates and clamping functions in their calculations. This bias incentivizes shorting perps, creating arbitrage opportunities.
- International reach: While unavailable to US entities, perps see peak trading volumes during US market hours, indicating their global significance.
- Growing institutional adoption: Major exchanges like Binance, Bybit, and OKEX lead in perps open interest, demonstrating the widespread adoption of these instruments.
As cryptocurrency markets mature, perpetual futures continue to play an increasingly important role. Their unique characteristics and growing popularity make them an essential tool for traders navigating digital assets.
For more detailed information, consult Coinbase Institutional’s Primer on Perpetual Futures. For specific questions, contact Steve Vlasak, Business Development Partner who specializes in Alternative Investments within Richey May.
