Crypto's 24/7 Trading Revolution Comes to US Stocks: Nasdaq 100, Tesla Futures Emerge

Crypto's perpetual swap model, a financial derivative that enables traders to speculate on an asset's price movements with high leverage and no expiration date, is now being extended to traditional US stock market assets. Developers are creating contracts for benchmarks such as the Nasdaq 100 index, and individual stocks like Tesla Inc. and Coinbase Global Inc. This innovation aims to offer 24/7 trading, bypassing traditional brokers and the usual market closing hours.

Traders utilize cryptocurrency collateral, often stablecoins like USDC, to open long or short positions. They essentially bet on the future price of the underlying stock or index through smart contracts, without actually owning the asset. Profits or losses are realized based on the price difference. A dynamic 'funding rate' mechanism helps keep the perpetual swap's price aligned with the real-world asset's price.

Impact

This development could significantly reshape retail trading by providing access to leveraged, nonstop speculation on US equities globally. It taps into the strong retail demand for leverage, offering much higher multipliers (up to 100x) than typically available in traditional US equity markets. However, the model presents substantial risks. These include extreme volatility, potential price distortions when traditional markets are closed as some platforms resort to modeling prices, and the fact that these contracts do not grant ownership rights such as dividends or voting powers.

The most significant hurdle is regulatory. These perpetual swaps operate in a legal grey area in the US, behaving like futures and securities but lacking explicit approval. While technically off-limits to US users, determined individuals can still access them via blockchain platforms. Industry players are exploring pathways for regulatory approval, with potential for future policy shifts. Despite past blowups and regulatory strain, these offerings are gaining momentum, with substantial open interest already recorded on some platforms.

Impact Rating: 7/10

This innovation carries significant potential to disrupt traditional trading norms and attract speculative capital, but faces considerable regulatory and operational challenges. Its success hinges on regulatory acceptance and the management of inherent risks.

Difficult Terms

• Perpetual Swap (Perp): A type of financial derivative contract that allows traders to speculate on the future price of an asset without an expiration date. They can go long (betting the price will rise) or short (betting the price will fall).
• Derivative: A financial contract whose value is derived from an underlying asset, group of assets, or benchmark.
• Leverage: Using borrowed funds to increase the potential return of an investment. High leverage amplifies both gains and losses.
• Collateral: An asset or guarantee pledged for the repayment of a loan or to secure a position in a trade.
• Smart Contract: A self-executing contract with the terms of the agreement directly written into code. They run on a blockchain and automatically execute when conditions are met.
• USDC Stablecoin: A cryptocurrency designed to maintain a stable value, typically pegged to the US dollar.
• Funding Rate: A mechanism in perpetual swap contracts that pays one group of traders (longs or shorts) from the other to incentivize the perp's price to stay close to the spot price of the underlying asset.
• Price Oracle: A service that provides external data, such as real-time asset prices, to a blockchain or smart contract.
• Market Maker: A firm or individual that stands ready to buy and sell a particular security on a regular and continuous basis at a publicly quoted price.
• Open Interest: The total number of outstanding derivative contracts that have not been settled. It represents the total volume of trading activity in a market.
• SEC (Securities and Exchange Commission): The US government agency responsible for regulating the securities markets.
• CFTC (Commodity Futures Trading Commission): The US government agency responsible for regulating futures and options markets.
• Liquidation: The process of closing out a trader's position when their margin (collateral) falls below a certain threshold, to prevent further losses and protect the platform.
• Margin: The collateral posted by a trader to open and maintain a leveraged position.