Perpetual Futures
6 days ago
- #crypto
- #finance
- #trading
- Bits about Money is supported by readers, with a forecast of one issue per month, but the author is working on 3-4 issues for December.
- Financial innovation often serves the real economy, but crypto introduces concepts like perpetual futures (perps) that are intellectually interesting but detached from real-world utility.
- Stablecoins, often collateralizing perps, facilitate massive payment flows, with about a quarter of the $300 billion in stablecoins sitting on exchanges.
- Perps dominate crypto trading volume, typically 6-8 times larger than spot trading, similar to traditional markets where derivatives often overshadow spot trading.
- Crypto exchanges function like casinos, requiring trust and capital to ensure payouts, with assets sitting idle, incurring implicit costs.
- Perpetual futures reduce capital requirements for exchanges and market makers, allowing risk-seeking gamblers to trade with less capital.
- Perps originated in traditional finance but gained popularity in crypto, with Bitmex credited as the popularizer.
- Perps settle multiple times a day via funding rates, where winners are paid by losers periodically, continuing the game unless positions are liquidated.
- Funding rates include an interest component, with leverage amplifying costs, often hidden in fine print.
- Basis trades exploit price discrepancies between perps and spot markets, aiming for convergence while being delta neutral.
- Crypto exchanges offer extreme leverage (up to 100X), contrasting with traditional markets' regulated limits (e.g., 4X in the U.S.).
- Liquidations are lucrative for exchanges but can lead to catastrophic failures if price moves exceed available capital.
- Automatic deleveraging (ADL) retroactively adjusts leverage during extreme moves, often harming sophisticated traders like those in basis trades.
- Traditional markets expect customers to cover negative balances, while crypto often writes off defaults due to pseudonymous users.
- Perps are unlikely to be adopted in traditional finance due to existing efficient derivatives and aversion to unpredictable liquidation risks.