What are perps, anyway? Everything you need to know about crypto’s hottest trading instrument
Perpetual swaps, also called perpetual futures or “perps” for short, are the dominant trading instrument in the crypto market, processing an estimated $40 to 50 trillion a year in volume. They dwarf spot trading, and they are the product that professional traders, hedge f…
Intelligence analysis by Llama
Perpetual swaps, or perps, are the dominant trading instrument in the crypto market, processing an estimated $40 to 50 trillion a year in volume. They are a type of derivative contract that tracks the price of an asset indefinitely, without an expiry date. This creates a self-correcting equilibrium, where the funding rate is calculated based on how far the perpetual swap price has dev…
Imagine you want to bet on the price of a toy. You can buy a special ticket that says you'll get the toy at a certain price later. But what if the price of the toy changes before you get it? A perpetual swap is like a ticket that never expires, so you can always bet on the price of the toy without worrying about it changing. It's like a special kind of insurance that helps you make money from the price of the toy.
Analysis
A $60B Vote of Confidence
Perpetual swaps, also called perpetual futures or “perps” for short, are the dominant trading instrument in the crypto market, processing an estimated $40 to 50 trillion a year in volume. They dwarf spot trading, and they are the product that professional traders, hedge funds and retail speculators reach for when they want leveraged exposure to the price of bitcoin or tther without owning the underlying asset.
Why Cursor?
In traditional finance, leveraged exposure to an asset typically comes through a futures contract, an agreement to buy or sell something at a set price on a specific date. When that date arrives, the contract expires and settles. Traders who want to maintain their position must roll it into the next contract. In crypto’s early days, this practice created persistent problems. Futures traded at a premium to the spot price of bitcoin, a concept known as basis, which confused retail traders who wanted straightforward directional exposure. And every time a contract expired, positions closed regardless of whether traders wanted them to.
The Road Ahead
A contract that never expires The perpetual swap, which Delo developed and BitMEX launched in 2016, resolved the problem by eliminating the expiry date entirely, creating a derivative contract that tracks the price of an asset indefinitely. There is no settlement date, no rolling and no expiry. Traders can hold a position for hours or years. This created an immediate structural challenge: without an expiry date to act as an anchor, nothing would naturally force the contract price back toward the spot price of the underlying asset. BitMEX solved this through a mechanism that has since become the industry standard. Every eight hours, a payment is exchanged between traders on opposite sides of the market. If the perpetual swap is trading above the spot price, indicating excess demand for long positions, traders who are long pay traders who are short. If the perpetual swap is trading below spot, the payment runs the other way. The exchange takes no cut. The rate of this payment, known as the funding rate, is calculated based on how far the perpetual swap price has deviated from spot over the preceding eight-hour window. The further the deviation, the higher the rate. This creates a self-correcting equilibrium. When longs are being charged a substantial funding rate, it becomes expensive to hold the position, which reduces demand and pulls the price back toward spot. Market makers accelerate this process by shorting the perpetual swap and buying spot whenever a meaningful premium opens up, capturing the difference as profit. The funding rate mechanism is now used, in essentially the same form, by every major derivatives exchange in the world.
Key points
- Perpetual swaps are the dominant trading instrument in the crypto market, processing an estimated $40 to 50 trillion a year in volume.
- They are a type of derivative contract that tracks the price of an asset indefinitely, without an expiry date.
- The funding rate mechanism is used to create a self-correcting equilibrium, where the funding rate is calculated based on how far the perpetual swap price has deviated from spot over the preceding eight-hour window.
- Market makers accelerate this process by shorting the perpetual swap and buying spot whenever a meaningful premium opens up, capturing the difference as profit.
If the perpetual swap market continues to grow, it could lead to more efficient price discovery in the crypto market, and potentially even influence traditional assets. This could lead to more opportunities for traders and investors, and potentially even drive the adoption of crypto as a mainstream asset class.
If the perpetual swap market becomes too volatile, it could lead to a loss of confidence in the market, and potentially even a collapse in the price of crypto assets. This could have serious consequences for traders and investors who have leveraged their positions, and potentially even lead to a wider market crash.
