Understanding Perps: The Most Traded Financial Instrument in Crypto

Perpetual swaps, or 'perps', have revolutionized the crypto market by providing a unique trading instrument that offers leveraged exposure to asset prices without owning the underlying asset. To comprehend perps, it's essential to understand their evolution. Traditional finance typically uses futures contracts, which expire on a specific date, to provide leveraged exposure. However, this approach created issues in crypto's early days, such as basis and expiring contracts. BitMEX addressed these problems by introducing perpetual swaps, which eliminate expiry dates and allow traders to hold positions indefinitely. A funding rate mechanism ensures that the contract price remains aligned with the spot price, and leverage enables traders to control larger positions. The combination of these features has made perpetual swaps the primary venue for price discovery in crypto, with regulators now exploring their application to traditional assets.