The Double-Edged Sword of Perpetual Futures: Benefits and Drawbacks According to Crypto Traders

When discussing crypto trading, perpetual futures, or 'perps,' are often the first topic of conversation among traders. These derivatives contracts allow traders to control large positions with minimal capital. Perps function similarly to standard futures but lack an expiry date, making them a unique and attractive option for traders. For altcoins, perps are frequently the only viable derivatives avenue due to illiquid dated futures and an underwhelming spot market. Traders who have found success in the perpetual futures market cite deep liquidity, affordable trading fees, and efficient margin use as key benefits. However, they also express concern over funding rates, which can accumulate over time and impact trading profitability. The perpetual nature of perps has shifted price discovery, allowing it to occur at any time, not just during traditional market hours. Traders like Lucas Krenn and Kenneth Ong point out that perps are not just one tool among many but are often the primary tool for crypto-native firms due to their necessity and the costs associated with dated futures. They highlight the advantages of perps, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Despite these benefits, traders are wary of the funding rate, which can be unpredictable and burdensome. Krenn and Ong note that the funding rate is a more significant concern than liquidations, as it can be unquantifiable at the point of trade and unhedgeable afterwards. They emphasize that holding positions for extended periods can lead to significant funding costs, potentially turning profitable trades into losses. The traders also address the misconception that perps are inherently riskier, attributing past issues to exchange margin models rather than the perps themselves. Krenn further inverts the common assumption about perp risk, stating that being long is structurally safer due to the ease of arbitraging away positive funding. The asymmetry in risk, with the long side having a bounded cost and unbounded upside, while the short side has a bounded upside and unbounded cost, is often overlooked in risk models. In conclusion, while perps have democratized futures trading by addressing issues of access, cost, and margin efficiency, they are not without unique challenges, particularly the volatile funding-rate exposure that cannot be quantified or hedged.