Crypto markets have good reason to go crazy again as perpetual futures go mainstream in the US
Institutions helped calm the crypto market, and are now helping to enhance volatility once again.
As bitcoin matured as an asset class, institutional adoption led to the cryptocurrency behaving more like other risky financial assets.
Now, the rising US popularity and institutional adoption of another financial innovation threatens to undo some of that progress by providing a vehicle where short-term volatility can quickly snowball, leading to a cascade of position closures.
At its most basic level, it’s the same old form of the most common reason for dramatic price swings: leverage.
The eyebrow-raising timing of the more than $1 billion in short positions initiated in bitcoin and ethereum (which came shortly before President Donald Trump announced his intention to impose a 100% tariff on Chinese imports above existing measures) is one thing. The manner in which this bet was made — through perpetual futures, which provided more than 10x leverage for this bet — is quite another.
Perpetual futures are indeed the hottest trade in crypto, as well documented by The Wall Street Journal, accounting for nearly 70% of bitcoin trading volume this year, per one estimate.
As the name implies, these are futures contracts that never expire. In order to keep prices close to what the underlying asset says they “should” be, the holders of long contracts pay their counterparts who are short a “funding rate” periodically if the price is above the spot price, or vice versa if below.
The amount of leverage on offer for those utilizing these products is eye-popping. BitMEX, for instance, advertises up to 250x leverage on its perpetual futures contracts.
Leverage means you can make or lose a lot of money quickly. In the aftermath of Trump’s plan to hike tariffs on China, it was more of the latter. Per CoinGlass, total liquidations across the crypto space in a 24-hour span were north of $19 billion on Friday evening, making this the top liquidation event of all time.
The rise of long-term oriented holders of cryptocurrencies in corporate treasuries and structure option-selling programs had helped calm bitcoin volatility (compared to that of stocks) significantly since the depths of its bear market in 2018.
Institutional adoption giveth, and other institutional innovation taketh away. Coinbase, for instance, launched US perpetual-style futures in July, an announcement that seemingly kickstarted a wave of American interest in the asset class.
(Robinhood is among the institutions that offer access to trading perpetual futures in Europe. Robinhood Markets Inc. is the parent company of Sherwood Media, an independently operated media company subject to certain legal and regulatory restrictions.)
If there’s one thing that I think describes modern trading psychology, it’s an extreme search for asymmetry. People (especially younger people, of which I once was) flock toward opportunities to make a lot of money quickly, whether that’s through options, parlays, or, in this case, perpetual futures.
This episode underscores one obvious truth regarding asymmetry: the vehicles that are seemingly the most conducive to multiplying your principal many times over are also the ones most likely to see it zero’d.
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