Trading in Perpetual Futures Hit $1 Billion on Kalshi in the First Week. Here's What That Means for the Crypto Market

Globally, perpetual futures are one of the most popular ways to speculate on the future prices of cryptocurrencies. But until recently, U.S-based customers had almost no way to get involved. That changed in early June, when prediction market Kalshi became the first U.S. regulator-approved platform to offer perpetual futures trading to its customers.

By all accounts, this new financial product has been a smash success. In the first 24 hours, trading volume on Kalshi hit $100 million. In the first week, total trading volume rocketed past $1 billion. This is obviously big business, and one that could reshape the way people invest in crypto.

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A new way to make money in down markets

Perhaps not surprisingly, trading in perpetual futures is taking off as the crypto market has been in steep decline. Market bellwether Bitcoin (CRYPTO: BTC) is down more than 30% for the year, and more speculative altcoins are down as much as 60% for the year. It's hard to make money in a market like that.

And that's where perpetual futures come into the picture. Traders can use perpetual futures to take short positions in a cryptocurrency, making them a useful tool during down markets.

So-called "perps" are futures contracts with no expiration date, enabling traders to speculate on the prices of cryptocurrencies without actually owning the underlying cryptocurrency. It's also possible to use leverage here, meaning your $100 investment might be used to control a $1,000 position.

The only caveat is that, given this leverage, even a relatively minor 10% market move might be enough to liquidate your position. Given how volatile the crypto market has been historically, it's quite possible that traders could be wiped out after just one bad day.

Risk factors

What's interesting is that Kalshi -- an online prediction market platform -- became the first to offer perpetual futures trading. It's a clear sign of the blurring of the lines between traditional financial markets, crypto markets, and online prediction markets.

This "blurriness" may hide some risks that are not so obvious to the end customer. These perpetual futures contracts are actually financial derivatives. Since they are derivatives (not securities), they are regulated by the Commodity Futures Trading Commission (CFTC), and not by the SEC. That has already stoked some controversy, with some worried about the risks involved.

There have already been some spectacular crypto liquidations. In one recent 24-hour period, for example, nearly $1 billion was liquidated after a downward move by Bitcoin caught traders by surprise. One trader lost $38 million in a single day. That's the level of risk involved here, due to the leverage being used.

If you are thinking about investing in cryptocurrency, be aware of the risks involved. Perpetual futures are the newest way to trade crypto, but they might not be the best for many investors. For most, investing via a cryptocurrency exchange or via a single crypto ETF might still be the best option.

Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.