Funding Payments Crisis-Proofed Bitcoin's Perpetual Futures

Abstract

We study futures contract design using the volatile cryptocurrency market as a laboratory. In this market, order flow frequently overwhelms arbitrage capital and pushes futures prices above or below their underlying assets. Perpetual futures emerged as a response to this. These contracts tightly track their underlying due to small, frequent payments. We show that these contracts reduced noise trader risk, dominated trading, and improved liquidity; and rationalize those results using a tractable model. We argue that these contracts offer potential financial stability benefits because they improve crisis liquidity and reduce the drawdowns of common arbitrage strategies by more than half.