Comment Text:
It's a HUGE NO for me on perpetual derivatives for the following reasons:
1. Excessive Leverage Amplifies Fragility
Unlimited leverage: Many venues allow 50×, 100× or greater leverage on perpetuals. A tiny price move can trigger mass liquidations, cascading into fire-sales that destabilize spot markets. When longs are blown out, spot prices plunge; when shorts are wiped, prices spike—creating vicious feedback loops.
Hidden interconnectedness: Leverage-funded arbitrage between spot and perpetual markets (basis trades) ties together—and thus transmits shocks across—otherwise distinct venues. In stressed conditions, these cross-market linkages can spark widescale dislocations, as seen in the U.S. Treasury “relative‐value” unwind of April 2025.
2. Funding‐Rate Mechanics Distort True Price Discovery
Artificial drift: The periodic funding payments—paid by one side of the market to the other depending on whether perpetual prices trade above or below spot—inject a deterministic bias. Traders chasing funding yields can push futures away from fundamental value, degrading the purity of the price signal.
Momentum feedback: When past returns are high, perpetuals trade at premiums that attract momentum players. As funding costs climb, momentum strategies accelerate positions, inflating bubbles that then reverse violently when sentiment shifts.
3. Elevated Transaction Costs and Adverse Selection
Higher implicit costs: Even if explicit fees are low, funding‐rate payments can cumulatively eat into returns—especially for directional traders. These hidden costs discourage genuine hedging and instead favor fast‐money strategies that extract rents.
Adverse selection: Sophisticated players—able to predict funding swings—exploit less informed participants, further skewing market rents toward insiders and hollowing out fair risk-sharing.
4. Encouragement of Wash-Trading and Volume Inflation
Wash-trade incentives: Exchanges earn funding‐rate and trading fees on every roll; higher volumes mean higher revenues. Empirical work shows that perpetual venues exhibit elevated wash-trading metrics, undermining genuine liquidity and misleading participants about real market depth.
False confidence: Inflated volumes give a spurious sense of market robustness. When true liquidity matters—in a crash—these illusions evaporate, exacerbating slippage and dislocations.
5. Systemic Tail-Risks and “Black-Swan” Vulnerability
No “off-ramp” expiry: Standard futures naturally converge to spot at expiry, capping the duration of leverage risk. Perpetuals, by design, never settle—risk can accumulate unchecked until a tiny trigger unleashes mass liquidations.
Regulatory blind spots: Many perpetual venues operate offshore or under light oversight. The absence of central clearing and robust margin protocols magnifies the potential for a cascading default—threatening contagion to traditional finance if gateways (e.g. on-ramps/off-ramps) seize up.
6. Undermining Healthy Hedging and Risk Management
Speculation over hedging: True hedgers (e.g. miners, exporters) often avoid perpetuals due to funding‐rate unpredictability. This leaves mainly speculators, reducing the natural counterparties needed for efficient risk transfer.
Misaligned incentives: Market-making algorithms may withdraw during volatile funding swings, thinning order books at precisely the worst moment.
7. Complexity Breeds Misunderstanding and Behavioral Bias
Opaque mechanics: Funding formulas, index compositions, and oracle adjustments can be opaque. Retail participants often misunderstand how costs accrue, leading to outsized losses and undermining confidence in markets.
Behavioral pitfalls: The perpetual design preys on overconfidence and loss-aversion biases. Traders hold losing positions too long—hoping funding will reverse—only to be wiped out when margin calls arrive.
The Broader Consequences:
Volatility spirals: With perpetuals, small shocks get amplified through leverage and feedback trading, turning minor news into full-blown crises.
Concentration of power: A handful of sophisticated players and exchanges capture most funding‐rate rents, skewing market structure toward oligopoly.
Erosion of trust: Repeated liquidations and flash crashes shake retail faith, deterring long-term investment and participation.
Regulatory quandary: Lightly-regulated perpetual venues create jurisdictional arbitrage, making coherent global rules difficult and leaving systemic holes.
In Sum:
Perpetual derivatives are not mere “innovations” in risk-management—they are potent amplifiers of leverage, opacity, and systemic fragility. By distorting price signals, incentivizing wash trades, and concentrating tail-risks, they undermine healthy markets and threaten stability. In essence, perpetuals turn what should be tools for hedging into weapons of mass disruption—making them an extremely negative force for modern financial ecosystems.
