U.S. Retail Investors Flock to High-Risk Virtual Asset Derivatives, "Perpetual Futures"

It has been revealed that U.S. retail investors are flocking to “perpetual futures,” a high-risk derivative product in the virtual asset market. However, warnings have emerged that the use of high leverage and forced liquidation structures could increase both investment losses and market volatility.

Associated Press and Yonhap News Agency

The Financial Times (FT) reported on July 19 (local time) that perpetual futures trading, permitted by the U.S. Commodity Futures Trading Commission (CFTC), has been growing. According to Kalshi, perpetual futures surpassed $1 billion in trading volume in less than a week after their launch in May. This was the fastest growth of any product ever offered by the company. Trading volumes have also surged globally. According to Bank of America (BofA), the global trading volume of virtual asset perpetual futures reached approximately $90 trillion last year, tripling from around $30 trillion in 2023.

However, FT noted that the risk of losses among small investors has increased, and market shocks could further widen volatility. For example, on October 10 of last year, when U.S. President Donald Trump threatened additional tariffs against China, the price of Bitcoin plunged by about 10 percent, resulting in more than 1.5 million virtual asset investors having their positions liquidated within 24 hours. Over the next six weeks, $1.2 trillion—equivalent to 25 percent of the total value of the global virtual asset market—was wiped out.

James Davies, founder of Derivative Clearing Network, pointed out that perpetual futures lack mechanisms to absorb shocks during crises, saying, "It's essentially like playing hot potato." He further warned that the greater the share of perpetual futures in the market, the higher the risks will become.

Benjamin Schifrin, Director of Securities Policy at consumer advocacy group Better Markets, also described perpetual futures as "the riskiest products in the virtual asset market" for retail investors. In May, he criticized the CFTC, suggesting that "the commission appears to have completely ignored the risks posed by the approved products."

Unlike ordinary futures contracts, perpetual futures do not have an expiration date and do not involve the actual delivery of underlying assets. Investors take positions based on whether they expect the price of assets like Bitcoin to rise or fall. Depending on the price gap with the spot market, one side—either long or short—periodically pays a “funding fee” to the other, which helps keep perpetual futures prices from diverging significantly from spot prices.

Offshore exchanges offer up to 40-fold leverage on a variety of assets, ranging from energy prices to the valuations of unlisted companies anticipating an initial public offering (IPO). This allows investors to take large positions with a small amount of margin. However, if losses mount and the margin falls below a certain threshold, positions can be immediately liquidated without any separate margin call process. FT pointed out that if liquidated assets are sold off in bulk during a bear market, the resulting price drop can trigger a vicious cycle in which other investors' positions are also liquidated one after another.

This content was produced with the assistance of AI translation services.