Uncovering Perps: The Ultimate Guide to Crypto's Most Popular Trading Instrument

Perpetual swaps, or 'perps,' have taken the crypto market by storm, offering a unique way for traders to gain leveraged exposure to assets like bitcoin without actually owning them. Despite their widespread use, the inner workings of perps remain poorly understood. To grasp the concept of perps, it's essential to look at their predecessors in traditional finance. Futures contracts, which allow investors to buy or sell assets at a fixed price on a specific date, were the primary means of achieving leveraged exposure. However, when these contracts expired, traders had to roll their positions into new contracts, creating a host of problems in the crypto space. The launch of perpetual swaps on BitMEX in 2016 revolutionized the market by eliminating expiry dates altogether. This innovative contract allows traders to hold positions indefinitely, with no need for rolling or settlement. To maintain price equilibrium, a funding rate is exchanged between traders every eight hours, based on the deviation of the perpetual swap price from the spot price. This self-correcting mechanism has become the industry standard. Perpetual swaps also offer high levels of leverage, allowing traders to control large positions with relatively small amounts of capital. To mitigate the risks associated with this leverage, exchanges employ automated liquidation systems to close positions before they incur significant losses. Today, perpetual swaps have become the primary venue for price discovery in the crypto market, with regulators exploring their application to traditional assets. What began as a solution to the limitations of crypto futures has evolved into one of the most widely traded financial products globally.