A cryptocurrency derivative product, known as perpetual futures, which only gained approval for trading in the United States in May of this year, is drawing a massive influx of retail investors.
However, consumer advocacy groups are labeling it "the most dangerous product in the crypto space," warning that its lack of safety buffers could lead to significant losses for small investors and amplify market volatility.
Perpetual futures differ from traditional futures contracts by having no expiration date and not involving physical delivery of the underlying asset. Traders simply take long or short positions based on their view of price movements.
The product allows for large, highly leveraged bets with a small amount of cash, with some offshore platforms offering leverage as high as 40 times.
Before gaining access to the US market, crypto perpetual futures were primarily operated by offshore exchanges based in jurisdictions like Seychelles and the Cayman Islands.
This year, several US-based companies, including Kalshi and Coinbase, were approved for the first time to offer the product, a move the chairman of the Commodity Futures Trading Commission (CFTC) called a "watershed moment" for US capital markets.
Perpetual futures have rapidly gained popularity in the US. Kalshi reported that the product reached $1 billion in trading volume less than a week after launch, becoming the fastest-growing product in the company's history.
Data shows annual trading volume for crypto perpetual futures reached approximately $90 trillion last year, far surpassing the roughly $30 trillion seen in 2023.
Analysts note that strong demand for oil perpetual futures on platforms like Hyperliquid following the outbreak of conflict in Iran almost certainly influenced the CFTC's decision to introduce perpetual futures trading to the US.
The product's regulatory classification is contentious. In May, the CFTC designated crypto perpetual futures as futures contracts rather than swaps, which are subject to stricter oversight.
Futures contracts face relatively lighter regulation and enjoy more favorable tax treatment and more lenient margin requirements.
The CME Group sued the CFTC last month, accusing its chairman of "single-handedly" rolling back regulations introduced after the 2008 financial crisis. Consumer advocacy groups have criticized the CFTC for "completely ignoring the risks of the approved product."
Unlike traditional markets, a perpetual futures trader's losing position is liquidated immediately when it falls below a certain threshold, sometimes with little to no warning.
In extreme cases, profitable positions may also be subject to "auto-deleveraging" to prevent an exchange from insolvency.
With no margin call buffer, the sudden liquidation of positions can force the sale of more assets into a falling market, driving prices down further and triggering more liquidations.
In October of this year, Bitcoin's price plunged roughly 10%, leading to over 1.5 million crypto traders being liquidated within 24 hours. The global crypto market lost $1.2 trillion (approximately 25%) in value over the subsequent six weeks.
Some analysts point out that while retail demand for short-term risk exposure is enormous, many investors cannot answer how much they could potentially lose on perpetual futures.
Despite the risks, perpetual futures are popular for providing continuous price signals—their trading volume is sufficient to facilitate price discovery even when traditional markets are closed.
Industry insiders warn, however, that the design of perpetual futures offers "no cushion in a crisis," and the greater their market share, the larger the potential systemic risk.
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