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Fundamentals of Perpetual Futures
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Perpetual futures are the most popular cryptocurrency derivatives. Perpetuals offer leveraged exposure to their underlying without rollover or direct ownership. Unlike fixed-maturity futures, perpetuals are not guaranteed to converge to the spot price. To minimize the gap between perpetual and spot prices, long investors periodically pay shorts a funding rate proportional to this difference. We derive no-arbitrage prices for perpetual futures in frictionless markets and bounds in markets with trading costs. Empirically, deviations from these prices in crypto are larger than in traditional currency markets, comove across currencies, and diminish over time. An implied arbitrage strategy yields high Sharpe ratios.
Forward citations
Cited by 2 Pith papers
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Reveal, Correct, Then Pay: Encrypted Mempools and Perpetual Funding Security
In commit-then-reveal mempools, a self-authored trade is hidden from the arbitrageurs who would correct it, so perpetual-futures funding distortion is amplified; privacy can therefore increase manipulation value despi...
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Designing funding rates for perpetual futures in cryptocurrency markets
A funding rate makes a perpetual future uniquely track any target price, with an explicit error bound for the 8-hour averaging window.
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