Perpetual Swaps and Crypto Market Liquidity

May 4, 2020 11:15 PM
BitMEX popularized perpetual swaps
Weekend funding rates on trading platforms were negative, short margin was in demand.
Crytpo and Bitcoin Market Cap Story of Day





Crypto is off marginally this morning after a quiet weekend. Volumes have shrunk again with spot activity only about 50% of the 30-day average.


Perpetual swaps are derivatives contracts that never expire. The instruments were popularized in cryptocurrency by the BitMEX trading platform and have since been copied by several venues, making them arguably the most important liquidity product in the space. With the contracts never expiring, there’s no mechanism, like with a future where the market price settles around the index price.

To deal with this issue, platforms use an equation which applies a funding rate to the swap. For instance, if the swap is being bought well above its index price, a funding rate will be utilized incentivizing short sellers (longs pay shorts). Often, arbitrageurs will take advantage of these rates by, in this case, buying the underlying index and then shorting the perpetual swap for a market neutral position capturing the platform's funding rate. Over the weekend funding rates on BitMEX and other platforms were almost exclusively negative, meaning that short margin was in demand and the platforms were attempting to incent traders to go long.

Takeaway: While increased demand for margin to go short may sound near-term bearish, it hasn't proven to be so historically. The most consistent indicators preceding market turnarounds are when either longs or shorts are overwhelmingly paying their counterparts. Such was the case at the beginning of the year, longs were paying shorts on BitMEX and other platforms for nearly 2 months with rates at times well over 50% annualized. That of course, culminated with the March 11 to 13 sell-off where it is now commonly believed that leverage played a role in the violence of the decline. While in fairness, a weekend of funding rates is only a marginal data point, if anything it shows that current price levels are not built on overly stretched long positions.

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FRNT Financial is a technology and sales layer that offers institutional and accredited investors access to various forms of exposure to crypto-assets. You can subscribe to FRNT Financial Morning Note at