Understanding Perpetual Swaps: The Dominant Force in Crypto Trading

Perpetual swaps, also known as 'perps,' have revolutionized the crypto market by providing a leveraged trading instrument that tracks the price of an asset indefinitely. With no expiry date, traders can hold positions for any duration, eliminating the need for rolling contracts. This innovative concept was developed by Ben Delo and launched on BitMEX in 2016, resolving issues associated with traditional futures contracts in the crypto space. The key to perpetual swaps lies in their funding rate mechanism, which ensures the contract price remains aligned with the spot price of the underlying asset. Every eight hours, a payment is exchanged between traders on opposite sides of the market, based on the deviation between the perpetual swap price and the spot price. This self-correcting equilibrium prevents the contract price from straying too far from the spot price. Furthermore, perpetual swaps offer high leverage, allowing traders to control large positions with relatively small amounts of capital. However, this increased leverage also necessitates robust risk management systems, including automated liquidation engines. Today, perpetual swaps have become the primary venue for price discovery in crypto, with their influence extending to traditional assets. Regulators are now exploring the potential application of perpetual swaps to equities, a testament to the durability and versatility of this innovative financial product.