The Dual Nature 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 expiry date, making them a unique and popular choice. For altcoin traders, perps are often the only viable option for derivatives trading due to the illiquidity of dated futures and the spot market. Traders appreciate perps for their deep liquidity, low trading fees, and efficient margin usage. However, they also express concern about the funding rates, which are recurring costs for keeping positions open. Funding rates can add up over time and are a significant expense for traders. The popularity of perps stems from their necessity, as dated futures are often too illiquid and expensive to replace. Perps offer better trading conditions, including lower fees and the ability to hold both long and short positions simultaneously. The perpetual nature of perps allows for price discovery to occur at any time, not just during market hours. This has led to a shift in how traders react to news and events. Despite the advantages, traders are cautious about the funding rates, which can be unpredictable and difficult to hedge. The funding rate can become a significant burden if the market does not move as expected, and it can potentially turn a profitable trade into a loss. Experienced traders emphasize that the funding rate is a critical aspect of perps that should not be ignored. They also highlight the importance of understanding the differences between perps and dated futures, as well as the risks associated with each. The lack of a liquid dated curve in crypto means that the market is exposed to interest rate risks that cannot be priced or hedged. As a result, funding rates have become a 'tax' that traders must pay for access to the leveraged market.