The popularity of perpetual futures in the crypto space has been undeniable, with the product now making its way into regulated American markets. This development has sparked a debate on Wall Street, with some viewing it as a fleeting trend and others seeing it as a potential threat to traditional futures. Notably, Kalshi's perpetual futures reached a trading volume of over $1 billion within a week of launch, prompting the company to seek regulatory approval for contracts tied to gold and silver.
The perpetual futures model, which eliminates the need for traders to close or roll over positions, has become a staple in global crypto trading, with estimated annual volume reaching $90 trillion, according to Bank of America. Following regulatory clearance from the Commodity Futures Trading Commission (CFTC), Coinbase also received approval to list regulated perpetual futures in the US. However, large financial institutions are exercising caution, choosing to study the product rather than rushing to launch.
Instead, proprietary trading firms, market makers, and newer clearing firms are likely to be the first movers. The difference in approach stems from the fact that big banks face stricter capital rules, client obligations, and reputational risk, making them more risk-averse. In contrast, prop shops have more freedom to test new venues and accept operational risk.
The potential applications of perpetual futures extend beyond speculation, as they could help traders manage weekend risk by providing a liquid 24-hour market. This could enable firms to adjust positions in real-time and use weekend prices to estimate where traditional futures may reopen. While demand is present, the lack of depth in the market and regulatory uncertainties are significant hurdles. The treatment of perpetual contracts as either futures or swaps is a key point of contention, affecting margin rules and registration duties.
As the market evolves, competitive disputes are emerging, with CME challenging the CFTC's treatment of Kalshi's bitcoin perpetuals. For now, Wall Street's approach is cautious, with trading firms, regulators, and exchanges adopting a wait-and-see attitude.