Unlocking the Secrets of Perpetual Swaps: The Hottest Crypto Trading Instrument

Perpetual swaps, also known as perpetual futures or 'perps', have revolutionized the crypto market, offering traders leveraged exposure to asset prices without the need for ownership. Despite their widespread adoption, the inner workings of perps remain poorly understood. To grasp the concept of perps, it's essential to examine their predecessors. Traditional finance typically provides leveraged exposure through futures contracts, which expire on a specific date. However, this approach created persistent issues in the crypto space, including basis and contract expirations. BitMEX, a derivatives exchange, addressed these problems by introducing perpetual swaps in 2016, eliminating the expiry date and creating a self-sustaining market. Every eight hours, a funding rate is calculated, and payments are exchanged between traders, keeping the contract price in check. This mechanism has become the industry standard, and the role of leverage has defined perpetual swaps, allowing traders to control large positions with minimal capital. The speed and reliability of automated liquidation systems have also become a key competitive differentiator. Today, perpetual swaps are the primary venue for price discovery in crypto, with regulators exploring their application to traditional assets.