The Rise of Perpetual Contracts in Volatility Trading

Perpetual swaps, unlike traditional futures contracts, do not have an expiration date. They utilize a funding rate system designed to align the contract price closely with the spot index. This mechanism aims to provide investors with a robust alternative to trading the actual VIX spot price.

“Traders don’t have to worry about expiries and decay and just focus on the direction of where they think the underlying is heading. The VIX is one of many more indexes, assets and metrics that will be perpified. We expect to see a strong wave of perp-ification to occur in the coming months,”
Martin Lee, market insights lead at DWF Labs, told CoinDesk.

Current Landscape of VIX Perpetual Contracts

Some exchanges, such as Gate, currently offer VIX/USDT perpetual contracts. However, the liquidity in this market remains low, with minimal trading volume. Recently, the emergence of futures linked to bitcoin’s implied volatility, specifically Volmex’s bitcoin VIX, marks a notable development in the field.

The Potential for Growth in Volatility Markets

The introduction of VIX futures could attract more participants to volatility markets. An increase in demand from buyers and sellers, alongside greater hedging activities by market makers dealing with VIX futures and various S&P 500 derivatives, may drive convergence among different VIX products.

Challenges in the Market

Despite the advantages offered by perpetual contracts, there are inherent costs, such as funding payments. Moreover, the VIX index itself is a derived mathematical calculation rather than a tangible asset like bitcoin. This characteristic presents difficulty for market makers, as they cannot easily purchase or sell the “spot” to manage their risks as effectively as bitcoin market makers can.

“For us, the interesting question is how funding would anchor an index that cannot be bought as a cash asset. Removing expiry does not remove hedge costs or basis risk. Until contract terms exist, this is a potential new volatility market, not a cheaper substitute for options convexity,”
analysts at Marex Solutions stated in an email.

The Convergence of Traditional and Crypto Markets

Cboe’s plans reflect a significant convergence between traditional market frameworks and cryptocurrency markets, enabling the development of sophisticated volatility products. The evolution of these markets is one to watch closely as they unfold.

For ongoing insights into altcoin activities, derivatives, and upcoming events, see Crypto Markets Today and CoinDesk’s Crypto Week Ahead.