Uncovering Perps: The Most Traded Financial Instrument in Crypto

Perpetual swaps, or 'perps', are the go-to trading instrument in the crypto market, handling massive volumes and outpacing spot trading. Despite their widespread use, the inner workings of perps remain unclear to many. To grasp the concept of perps, it's essential to understand their origins. In traditional finance, leveraged exposure to an asset typically involves a futures contract, which expires on a specific date. However, this approach created issues in the early days of crypto. Futures contracts traded at a premium to the spot price of bitcoin, causing confusion among retail traders. The expiry of contracts also led to the closure of positions, regardless of the traders' intentions. BitMEX, a derivatives exchange, addressed this problem by introducing perpetual swaps in 2016. These contracts have no expiry date, allowing traders to hold positions for any duration. The exchange solved the issue of price deviation from the spot price through a funding rate mechanism, where payments are exchanged between traders every eight hours. This self-correcting equilibrium has become the industry standard. Perpetual swaps also offer leverage, enabling traders to control larger positions with lower capital. However, this increases the risk, and exchanges use automated liquidation systems to manage it. Today, perpetual swaps are the primary venue for price discovery in crypto, with regulators exploring their application to traditional assets. What started as a solution to the limitations of crypto futures has evolved into one of the most traded financial products globally.