26 September 2023

Navigating the World of Crypto Derivatives: Leverex Rolling Futures vs. Perpetual Futures

Cryptocurrency traders have long sought leveraged exposure to the spot price of bitcoin and other cryptocurrencies. To accommodate this demand, perpetual futures were developed and have since grown to trade several billion dollars a day. Leverex Rolling Futures aims to offer the same basic premise, leveraged exposure to an underlying product, but with a different risk model which improves upon the benefits offered by perpetual futures. Let's dive into a comparison of the trade-offs:

1. Expiration Dates:

Leverex Rolling Futures: Imagine rolling futures as having predefined expiration dates, much like traditional futures contracts. However, here's the twist - the net exposure is automatically rolled over into the next contract, creating a perpetual exposure. This rollover occurs like clockwork at the end of each hour.

Perpetual Futures: As the name suggests, perpetual futures don't play by the rules of set expiration dates. They can be held indefinitely, giving traders the freedom to maintain their positions as long as they please.

It's worth noting that both still offer continuous exposure, but they achieve it through different methods.

2. Price Stability Mechanism:

Leverex Rolling Futures: At the close of each contract, Leverex rolling futures settle against an external index price. This is the moment when profits and losses are settled, and the net exposure is rolled over into a new contract. Importantly, this process incurs zero costs associated with transitioning from one contract to another.

Perpetual Futures: Perpetual futures employ a clever Price Stability Mechanism to closely align the contract price with the spot price of the underlying asset. To keep this alignment in check, long and short traders pay or receive funding at regular intervals. The rate at which this happens is determined by the market's supply and demand for the contract.3. Pricing and Premiums:

Leverex Rolling Futures: Think of these contracts as meticulous trackers of the spot price of the underlying asset. They settle against the index price every hour, ensuring that they stay closely in sync.

Perpetual Futures: Perpetual futures contracts may sometimes trade at a premium or discount relative to the spot price of the underlying asset. Traders are encouraged to bring the contract price in line with the spot price through the funding mechanism, reducing the chances of significant premiums or discounts.

4. Risk and Funding Costs:

Leverex Rolling Futures: Traders in rolling futures enjoy the perk of zero funding costs when holding leveraged positions over time. There are also no expenses associated with contract rolls. The model is refreshingly simple and easy to grasp.

Perpetual Futures: Perpetual futures introduce an element of uncertainty due to the unknown funding rates associated with position maintenance. While the cost of carrying a position over time remains unpredictable. However, this unpredictability also offers an arbitrage opportunity if you take the opposite position where you receive funding for holding it.

5. Defaults and Forced Liquidations:

Leverex Rolling Futures: In the world of rolling futures, settlement happens at the index price every hour. If a trader's account lacks sufficient margin to re-margin their net exposure by 10 percent in the next session, the net exposure is automatically reduced. This ensures that the new session's net longs match the number of net shorts. Liquidations take place during rolls.

Perpetual Futures: These instruments employ automated liquidation mechanisms, which can sometimes lead to cascading defaults. When one trader or a series of traders' defaults, it can trigger a chain reaction of defaults among others. This has the potential to cause widespread systemic issues within the market. Even in cases where cascading defaults are avoided, automated liquidations often result in slippage and additional losses for the trader.

In Summary

Both Leverex Rolling Futures and perpetual futures offer traders a way to gain leveraged exposure to the spot price of cryptocurrencies. However, they differ in price transparency, how they maintain price alignment with the spot market, and how defaults and liquidations are handled. Leverex rolling futures provide a structured approach with a clear profit and loss schedule, transparent costs, and a straightforward liquidation process. On the other hand, perpetual futures present opportunities for funding rate arbitrage.

Ultimately, the choice between these derivatives should be made carefully, considering individual trading needs and prevailing market conditions. Happy trading!