Shares of crypto-friendly exchanges could soar if this little-known trade gains traction
The Fed needs a 24/7 system for banks to move cash. This futures contract could be the answer.
There’s a financial instrument doing $160 billion in daily trading volume – three times bitcoin’s (BTCUSD) daily spot trading volume – $58.5 trillion in 2024 alone.
It’s called a perpetual future, and until Coinbase Global (COIN) received CFTC approval last July, it was effectively unavailable to American retail investors, which means it was generating obscene profits everywhere else while Americans were stuck with plain vanilla futures and limited leverage options.
What the heck is a perpetual future?
Picture a futures contract that never expires. You can bet on bitcoin going up or down, use truly deranged amounts of leverage and never face that awkward moment when the contract expires and someone asks if you’d actually like to take delivery of 100 bitcoins. (You would not. You live in a condo. Bitcoin is digital. This whole situation is ridiculous.)
Every eight hours, traders – longs and shorts – exchange “funding rate” payments to keep the perpetual contract price anchored to the spot price. If too many degenerate gamblers are betting on bitcoin going up, the perpetual price rises above spot. The solution? Make the longs pay the shorts every eight hours until enough people say “Screw this. I’m out.” It’s surge pricing for leverage, as if Uber and a derivatives exchange had a baby.
Why does this matter? While the financial media was writing the 47,000th article about whether bitcoin is “digital gold” or “digital tulips,” perpetual futures quietly became 90% of all crypto derivatives trading globally. They’re the infrastructure layer nobody saw coming.
The $200 billion annual scam you’re subsidizing
The Fed pays 4.15% on bank reserves while its QE-era assets earn 1-2%. The spread costs the Fed $200 billion annually.
Your gold positions are up nicely this year. Congratulations – you correctly predicted that governments would debase currencies while lying about it.
Now here’s where the U.S. Federal Reserve enters the picture, and things get stupid.
Every day, Bank A sends $100 million to Bank B to settle securities trades or clear derivatives, but Bank A might not actually have $100 million in reserves at that exact moment.
They’re kiting checks, except it’s legal because they’re banks and you’re not.
The Fed provides $150-$200 billion of temporary intraday credit, called “daylight overdrafts,” to prevent the whole thing from collapsing. Banks settle up by the end of the day. Usually.
Before 2008, banks paid fees for overdrafts and managed their liquidity carefully. Then the financial crisis hit. The Fed’s solution was to flood the system with excess reserves via quantitative easing – $3.5 trillion in Treasury and mortgage purchases between 2008 and 2014. Reserves exploded to more than $2.7 trillion from $10 billion. Problem solved.
Except now the Fed pays 4.15% on those bank reserves while its QE-era assets earn 1-2%. The spread costs the Fed $200 billion annually. Treasury remittances to taxpayers stopped in 2022. The world’s most powerful central bank is losing more money than most countries produce.
They paid banks not to need the service the Fed was created to provide. It’s like paying the fire department not to fight fires.
On Oct. 15, amid $40 billion in Treasury settlements, banks tapped the Fed’s Standing Repo Facility for $6.5 billion – the highest non-quarter-end level since the Covid-19 pandemic.
Bank reserves fell below $3 trillion for the first time. SOFR (Secured Overnight Financing Rate) and TGCR (Treasury General Collateral Repo Rate) spreads are widening, signaling intermediation frictions.
The U.S. financial system is transitioning from “abundant” to “ample” reserves, and Fed officials are fighting over whether the problem they created requires more of the thing that created the problem.
The Fed fight: Logan vs. Bowman
This has sparked a policy battle between Fed governors.
Lorie Logan’s camp wants to keep the abundant reserves but shift the target rate from Fed Funds to TGCR. Keep the subsidy, and just make it more “efficient” and “market-based.” Use the Standing Repo Facility to prevent rate spikes.
In other words: “We screwed up, but we can screw up better.”
Michelle Bowman’s camp wants to return to “scarce reserves” – the pre-2008 model where the Fed manages things. Banks would have fewer excess reserves, so they’d need overdrafts again. But this time the Fed would actually charge them for it. Real fees. Surge pricing during stress. Active balance sheet management.
Fed Chair Powell and other officials lean toward Logan’s approach – stop quantitative tightening (QT) when reserves reach a “sufficient” level. Bowman stands more alone, advocating for continued balance sheet reduction until reserves become truly scarce. Bowman’s key quote: “It is not the Fed’s role to replace or arbitrage private-market activities.”
Translation: Banks should pay for the liquidity they use, not stick taxpayers with the bill.
This is apparently a controversial position in Washington.
The solution nobody at the Fed is thinking about
Perpetual futures trade 24/7. They adjust funding rates every eight hours based on supply and demand. They provide real-time price discovery for leverage costs. They work.
Academics have proven that intraday liquidity has a price. Research has demonstrated that an implicit hourly interest rate exists in payment systems – intraday money markets are real, they just don’t have infrastructure.
The Fed is moving toward 24/7 operations. Fedwire processes $3-$4 trillion daily in bank payments. By 2028-2029, it will run 22 hours per day, six days a week. If Bowman’s camp wins the reserve framework debate, banks will pay for the intraday liquidity they use: real fees, surge pricing during stress, and active management.
The problem is that traditional Fed tools are too slow. Discount window rates are set by committee. Reserve requirements? Adjusted quarterly, if you’re lucky. The Fed needs a 24/7 mechanism to dynamically price intraday liquidity.
And here’s what nobody in Washington has figured out yet: The instrument that solves this problem already exists.
Perpetual futures trade 24/7. They adjust funding rates every eight hours based on supply and demand. They provide real-time price discovery for leverage costs. They work.
The financial innovation that could solve a $200 billion annual problem in the U.S. banking system was invented by anonymous crypto traders gambling on dog-themed coins with 100x leverage at 4 a.m.
Adam Smith’s invisible hand has developed a deranged sense of humor.
If perpetuals became Fed infrastructure for pricing banking system liquidity -and they should – then the perpetuals market isn’t $58.5 trillion in crypto derivatives anymore. Fedwire processes more than $4 trillion daily in bank payments. The on-ramp to the entire U.S. banking system just opened.
Selling shovels in the gold rush: A time-honored tradition
Most of you sensibly have zero interest in trading perpetual futures yourselves. But the infrastructure providers? The people running the casino? That’s different. The house always wins.
Coinbase Global: If the Fed adopts a scarce reserves framework and needs 24/7 dynamic pricing, COIN becomes the DTCC (Depository Trust & Clearing Corporation) of real-time banking liquidity. It already has CFTC Designated Contract Market status – one of three entities the Fed trusts with its trillion-dollar infrastructure.
Circle Internet Group (CRCL): Every perpetual trade requires USDC collateral – Circle’s stablecoin. In crypto terms: $76 billion in USDC outstanding, earning Treasury yield. If USDC becomes the settlement layer for the banking system’s intraday credit? We’re looking at $500 billion to $1 trillion in circulation.
Circle’s revenue model then would transform from “earn 3%-4% on Treasurys” to “charge settlement fees on trillions in banking flows.”
Robinhood Markets (HOOD): Emerging exposure to perpetuals. Perpetuals are live in Europe, with the U.S. launch pending. If perpetuals became Fed infrastructure, retail access becomes politically essential. The Fed can’t create a liquidity mechanism only available to Goldman Sachs. Robinhood then becomes the democratization angle that makes the whole scheme palatable to Congress.
Ways you can still lose your money (a partial list)
Infrastructure providers win from volatility and volume, not price direction. But they face three risks:
Exchange failure risk: FTX proved that “regulated” doesn’t equal “safe.” Just because COIN has DCM status doesn’t mean it can’t fail spectacularly.
Regulatory reversal risk: The U.K. banned retail crypto derivatives entirely in 2021. The U.S. could follow if there’s another major blowup. Though if perpetuals become Fed infrastructure, this risk decreases. Hard to ban something the Federal Reserve needs.
Execution risk: Will volume migrate onshore? Offshore traders prefer 100x leverage and zero know-your-customer. The infrastructure only works if people use it.
What now? (The question everyone’s really asking)
The smart money has stopped betting on crypto prices.
Coinbase shares closed on Friday at $354.46, up 38% year-to-date. Circle closed at $142.05, up 358% since its June IPO. Robinhood closed at $139.79, up 254% year-to-date.
The smart money has stopped betting on crypto prices. They’ve learned. Now they’re betting on the plumbing – the boring, unglamorous infrastructure that keeps the casino running while everyone else is losing their shirts at the tables.
