Alternative Investment

Unlocking the Power of Perpetual Futures: Crypto’s Game-Changing Trading Tool 

Perpetual futures, affectionately 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: 

• Unmatched popularity: Bitcoin perpetual futures boasted an average daily volume of $57.7 billion on weekdays in Q1 2024, dwarfing the $18.8 billion in spot trading. This staggering difference highlights the growing preference for perps among traders. 

• Leverage without the hassle: Perps provide easy access to leverage without the rollover costs associated with traditional fixed-term futures. This feature makes them attractive for both speculative and hedging strategies. 

• Funding rate mechanics: The unique funding rate mechanism of perps allows them to track spot prices with remarkable precision. This system creates a self-balancing market where long and short position holders periodically exchange payments. 

• Market sentiment indicator: Funding rates are often viewed as a barometer for market sentiment and leverage. While they may not be leading indicators for price movements, persistently high funding rates could signal periods of increased volatility. 

• Positive skew by design: Interestingly, funding rates tend to skew positive due to built-in base interest rates and clamping functions used in their calculations. This bias incentivizes shorting perps, creating opportunities for arbitrage. 

• Global accessibility: While unavailable to US entities, perps see peak trading volumes during US market hours, indicating their global appeal. 

• Open interest as an adoption metric: Major exchanges like Binance, Bybit, and OKEX lead in perps open interest, showcasing the growing adoption of these instruments. 

As the crypto market evolves, perpetual futures are poised to play an increasingly crucial role. Their unique characteristics and growing popularity make them an essential tool for traders navigating the complex world of cryptocurrency. Whether you’re a seasoned pro or a curious newcomer, understanding the mechanics and implications of perps is becoming indispensable in today’s crypto landscape. 
 
To learn more, click here to read a Primer on Perpetual Futures from Coinbase Institutional.

Have questions? Don’t hesitate to reach out to Steve Vlasak, Business Development Partner, Alternative Investments Practice.