What are perps, anyway? Everything you need to know about crypto’s hottest trading instrument

Perpetual swaps, often called "perps," are the leading trading instrument in the cryptocurrency market, handling approximately $40 to $50 trillion in annual trading volume. These contracts provide leveraged exposure to assets like bitcoin without the need to own the underlying asset directly. Unlike traditional futures contracts, which have fixed expiration dates requiring traders to roll over positions regularly, perpetual swaps have no expiry. This key difference allows traders to hold positions indefinitely, from hours to years, without forced settlement.

The perpetual swap was introduced by BitMEX in 2016, developed by Ben Delo, to address persistent issues seen with traditional crypto futures, such as premiums over spot prices and inconvenient contract expirations. The contract’s lack of an expiry date created a new challenge: maintaining price alignment with the underlying asset. BitMEX solved this through a funding rate mechanism, where payments are exchanged every eight hours between traders holding long and short positions based on how much the perpetual swap price deviates from the spot price. This self-correcting system incentivizes traders to reduce positions when prices stray from spot, maintaining equilibrium without direct exchange intervention.

Leverage is another critical aspect of perpetual swaps, with many platforms allowing traders to control positions significantly larger than their initial margin—historically up to 100 times on BitMEX. This high leverage amplifies potential profits and losses, prompting exchanges to use automated liquidation systems to close losing positions before losses exceed deposited margin, protecting the platform from deficits. The reliability of these liquidation systems has been a key competitive feature for exchanges.

Perpetual swaps have become the primary venue for price discovery in crypto markets, often leading price movements before they appear in spot markets. Their design has proven so robust that traditional finance is now considering adopting similar products, with the Chicago Mercantile Exchange (CME) exploring perpetual swaps on equities. What began as a solution to crypto futures’ limitations has evolved into one of the world’s most heavily traded financial instruments.