Comment Text:
Perpetual contracts have the potential to destabilize the stock market by introducing excessive volatility. Their appeal to speculators often results in trading activity that is disconnected from a company’s underlying fundamentals, leading to unpredictable price fluctuations. When used for aggressive short selling, these contracts can put downward pressure on stock prices, making it more difficult for companies to raise capital and eroding investor confidence.
In markets with lighter regulation, retail investors are particularly vulnerable to risks such as platform outages, counterparty defaults, and limited avenues for legal recourse. These challenges make perpetual contracts especially risky for individual investors and pose a broader threat to market stability.
A key feature of perpetual contracts is high leverage, which tends to attract speculative traders. This can amplify price movements and further destabilize stock prices, especially during turbulent market conditions. The surge in speculative activity fueled by leverage can distort stock valuations, making them less representative of a company’s true worth. This distortion can impede companies’ fundraising efforts and shake investor trust-risks that are magnified if retail participants, who may not fully understand the complexities involved, are heavily involved. The resulting volatility could cause erratic price swings, similar to those observed in cryptocurrency markets where perpetual contracts are prevalent.
