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

When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic that comes up. These derivatives contracts allow traders to control larger positions with less capital. Unlike standard futures, perps do not have an expiration date. For traders of alternative cryptocurrencies, perps are often the only derivatives option available, as dated futures for these coins are typically illiquid. Spot markets are also not a viable option for short-term trading. CoinDesk spoke with traders who have found success in the perps market to understand what sets them apart from other derivatives and how they cater to the needs of both institutional and retail traders. The traders' responses highlighted the benefits of perps, including their deep liquidity, low trading fees, and efficient margin usage. However, they also expressed concerns over funding rates, which are recurring costs associated with keeping positions open. Funding rates can be thought of as interest charges that accumulate over time. The traders noted that while perps offer many advantages, the funding rate can significantly add to trading expenses. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the foundation of their trading activities. 'Outside of bitcoin and ether, dated futures lack liquidity, making perps the primary tool for crypto-native firms,' he said. Dated futures are less popular due to the costs associated with replacing them at expiration, which also affects the efficiency of futures-based ETFs. Kenneth Ong, an independent trader, shared a similar perspective, citing the benefits of perps for retail traders, including better execution prices, lower fees, and the ability to hold both long and short positions simultaneously. Ong started trading in the spot market but shifted to perps due to their advantages. Both Krenn and Ong emphasized that margin efficiency is a significant draw for perps, allowing traders to manage risk across different venues and tokens. The perpetual nature of perps has also changed the way price discovery occurs, with news and events now influencing prices at any time, rather than only during market hours. Ong recalled an instance during the Iran conflict, where tokenized oil trading on Hyperliquid saw a surge in volume over a weekend, with the 'official' market closed. By the time the market reopened, some of the price adjustments had already occurred. Krenn sees this mechanism playing out in perps tied to other traditional assets, such as tokenized equities. Building a proper tokenized equity product is challenging, but perps can sidestep these complexities, making them appealing for traders. Both traders believe that the use of perps will continue to grow, with Ong noting that tokenized oil trading is a preview of what's to come for other commodities. As liquidity deepens across commodities and equities, it may reduce the need for dated futures. However, traders also warned about the risks associated with perps, particularly the funding rate. Unlike dated futures, which have a fixed interest rate, perps have a funding rate that changes over time and is typically charged every eight hours. This exposes traders to a floating rate, which can become a burden if the market doesn't move as expected. Krenn described the funding rate as 'unquantifiable at the point of trade and unhedgeable afterwards.' Ong was more blunt, stating that the funding rate can potentially turn a profitable trade into a loss if held for an extended period. The traders also addressed the issue of liquidations, which can occur when a trader's margin is insufficient to cover their positions. While this is a risk associated with perps, Krenn argued that it is not a problem with perps themselves, but rather with the margin models used by crypto exchanges. He noted that dated futures on the same venues face the same issues. Krenn also offered an interesting insight into the risk associated with perps, suggesting that being long is structurally safer than being short. His logic is that positive funding can be easily arbitraged away, but negative funding is more difficult to address, particularly if the circulating supply of a token is small and concentrated. This can lead to persistent gaps between perp and spot prices, resulting in extremely negative funding rates. In conclusion, while perps have democratized futures trading by providing access, low costs, and efficient margin usage, they also come with unique challenges, such as volatile funding-rate exposure. As Krenn put it, 'Until there is a liquid dated curve in crypto, the whole market is carrying an interest rate exposure it cannot price and cannot hedge.' For now, funding remains the cost of accessing this leveraged market.