Understanding Perpetual Swaps: The Most Traded Financial Product in Crypto

Perpetual swaps, or 'perps', are a type of derivative contract that has revolutionized the crypto market. They allow traders to gain leveraged exposure to the price of assets like bitcoin without actually owning them. To comprehend perps, it's essential to understand their origins. In traditional finance, leveraged exposure typically comes through futures contracts, which have a set expiration date. However, this approach created problems in the crypto space, such as basis and contract expirations. BitMEX, a derivatives exchange, addressed these issues by introducing perpetual swaps, which have no expiration date and track the asset price indefinitely. A key mechanism in perps is the funding rate, which is exchanged between traders every eight hours to maintain the contract price close to the spot price. This self-correcting equilibrium is now an industry standard. Perps also offer high leverage, allowing traders to control large positions with minimal capital. To manage risk, exchanges use automated liquidation systems. Today, perps are the primary venue for price discovery in crypto, with regulators exploring their application to traditional assets. What started as a solution for crypto futures has become a global trading phenomenon.