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It is hard to get back into a market just after a mauling — as cryptocurrencies suffered last week, led by bitcoin’s 15 per cent tumble. It can be harder still to jump into the products — perpetual futures — that are believed to have produced the crash. So-called perps, though, are about to go mainstream, providing a far more significant test of investor appetite for crypto than one weekend’s drubbing.
Perps enable leveraged bets on the future price of crypto coins. Unlike most derivatives, they do not have an expiry date or have one years into the future. Like long-dated swaps or contracts for difference, account balances are credited or debited regularly — often three times daily — to reflect changes in the underlying asset price. Their leverage, which can reach 100 to 1 on some crypto exchanges, means investors can lose their initial stake on relatively small moves. Forced liquidations on offshore exchanges may have exacerbated last week’s crypto crash. Bitcoin has since recovered some ground, though only shakily.
As well as the opportunity to win big from small stakes, perpetuals are popular because they are easier to trade than the clunky cryptocurrencies on which they’re based. About three-quarters of all crypto trading is via derivatives and of that, about two-thirds is done through perps on exchanges such as Binance and Coinbase International, according to Kaiko, a data provider.
Despite the product’s risky reputation, it is now drawing in mainstream exchanges. The Singapore Exchange plans to launch bitcoin and ethereum perps next month while US options specialist and Chicago stalwart Cboe Global Markets is also getting into the game with similar products it has dubbed “continuous futures”.
What’s interesting about these grandes dames of the trading world getting into perps is that their audience isn’t just the small trading firms and local offshoots of big US and European funds that routinely trade on crypto exchanges such as Binance, but those big managers that won’t or can’t trade via riskier jurisdictions. That gives these institutions their first chance to bet on crypto via its favourite product.
If the most mainstream of money is as keen to jump into crypto as digital asset boosters suggest, here’s their chance — and without being tempted to bet the farm, either. SGX will be offering 3 to 1 leverage while Cboe’s limits will be set by US watchdogs that still skew cautious. Crypto exchange Coinbase, for example, was permitted to launch the first US perp-like product in July with 10 to 1 leverage, though that was aimed at retail traders.
Bitcoin’s weekend drama was undoubtedly painful for those involved but its ripples haven’t spread far though the financial system. There’s an argument that bringing crypto mainstream will curb its volatility — the more sober leverage on offer will reduce the risk of forced liquidations, for starters. Of course, the alternative is that mainstreaming crypto tools only spreads those waves further, when bitcoin next stumbles.
jennifer.hughes@ft.com
