An Introduction to Futures and Perpetual Swaps
In the past year, we’ve seen an influx of new market participants to crypto, including large financial institutions and respected investment funds. This wasn’t an overnight process — it started happening over the course of the last bear market and has continued into the current bull market. While this was brewing on the sidelines, crypto exchanges were building the necessary infrastructure and products to cater to this growing audience.
The biggest difference between the market today and during the last cycle is the proliferation of derivatives — notably, perpetual swaps. Perpetual swaps are derivatives that let you buy or sell the underlying asset at any point in time. They’re basically futures contracts with no explicit expiration date. And because of that, they’re usually bunched in with futures. Perpetual swaps are also called perpetual futures.
Perpetual swaps rely on two critical aspects to be useful: an index price and a funding rate. In order to ensure a perpetual contract is trading at its fair value, it needs to anchor itself to an index price. This index usually comprises BTC-USD price feeds from multiple spot exchanges such as Bitstamp, Bitfinex, Coinbase, and others. But for the perpetual contract to trade in line with the market, there needs to be an incentive for arbitrageurs to restore price parity. That’s where the funding rate kicks in.