Understanding Perpetual Swaps: The Dominant Crypto Trading Instrument

Perpetual swaps, or 'perps', process an estimated $40 trillion to $50 trillion annually, surpassing spot trading in volume. They are the go-to instrument for professional traders, hedge funds, and retail speculators seeking leveraged exposure to bitcoin and other assets. To understand perps, it's essential to look at their origins. In traditional finance, futures contracts provide leveraged exposure, but they expire on a specific date, requiring traders to roll their positions into the next contract. This created issues in crypto's early days, with futures trading at a premium to the spot price, known as basis, and positions closing upon contract expiration. BitMEX addressed this by introducing perpetual swaps, which have no expiry date and track asset prices indefinitely. A funding rate mechanism ensures the contract price remains aligned with the spot price, with payments exchanged between traders every eight hours. Leverage is another key feature, allowing traders to control larger positions with deposited capital, although this comes with risks managed by automated liquidation systems. Perpetual swaps have become the primary venue for price discovery in crypto, with regulators exploring their application to traditional assets.