The popularity of perpetual futures in the crypto space has been evident for years, particularly among investors outside the US. Now, with these contracts being introduced to regulated American markets, Wall Street is left to ponder whether they represent a fleeting retail trend or a lasting challenge to traditional futures. Notably, Kalshi's perpetual futures achieved a trading volume of over $1 billion within a week of their launch in June, marking the company's most successful product debut since prediction markets.
The exchange has since sought regulatory approval to offer perpetual futures tied to gold and silver, indicating that the product may expand beyond bitcoin and other digital assets. Perpetual futures, also known as 'perps,' are distinct from standard futures contracts in that they do not expire.
Instead of requiring traders to close or roll over their positions into new contracts each month or quarter, periodic funding payments help maintain the contract's price in proximity to the underlying asset. This product has become a cornerstone of global crypto trading, with Bank of America estimating the annual volume of perpetual futures to be around $90 trillion.
Following the Commodity Futures Trading Commission's (CFTC) clearance of Kalshi to offer these contracts on May 29, Coinbase also received approval to list regulated perpetual futures in the US. However, within Wall Street, interest in perpetual futures does not necessarily translate to immediate adoption. While discussions about perps are becoming more frequent, partly due to US regulators allowing offshore markets to move onshore, most large financial institutions are still in the process of studying these products rather than preparing for major launches.
The first movers in this space are more likely to be proprietary trading firms, market makers, and newer clearing firms, which have more freedom to test new venues and accept operational risks due to their ability to trade with their own capital. In contrast, big banks face stricter capital rules, client obligations, and reputational risks, making them more cautious. The potential applications of perpetual futures extend beyond speculation, as they could help traders manage weekend risk more effectively. Traditional futures markets are closed for part of the weekend, but significant events like wars, elections, and policy decisions can occur during this time, leaving traders unable to hedge against sharp moves until Sunday night.
A liquid 24-hour perpetual market could provide a solution, allowing firms to adjust their positions in response to events and use weekend prices to estimate where CME futures may reopen, thus serving as both a hedge and a source of price discovery. However, for firms to commit capital, there must be sufficient demand. The main challenge lies in depth, as a contract may trade around the clock but institutions may still struggle to move large positions without significantly impacting the market.
Weekend liquidity remains thin, and collateral systems do not always move as quickly as the markets they support. A regulatory battle is also emerging, with questions surrounding whether some perpetual contracts should be treated as futures or swaps, which affects margin rules, registration duties, and who can provide liquidity.
Industry insiders believe these legal questions will become more critical as exchanges expand perpetuals into commodities, equities, and other traditional markets. The debate is also taking on a competitive dimension, with CME challenging the CFTC's treatment of Kalshi's bitcoin perpetuals and arguing for different regulation.
Similar disputes may arise if exchanges seek to introduce perpetuals into equities and other asset classes. For now, Wall Street's stance is cautious rather than hostile, with trading firms seeing a familiar product, regulators viewing a market moving onshore, and exchanges seeing an opportunity to capture new volume.
Nonetheless, the largest banks are unlikely to take the lead, opting instead to wait for the rules, liquidity, and infrastructure to mature.