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 large positions with minimal capital. Unlike standard futures, perps do not have an expiration date, making them a unique and attractive option for traders. For altcoin traders, perps are often the only viable derivatives market available, as dated futures for these assets are typically illiquid. CoinDesk spoke with traders who have thrived in the perps market to understand what sets them apart from other derivatives and how they cater to both institutional and retail traders. The traders unanimously agreed that perps offer deep liquidity, low trading fees, and efficient margin usage, making them an essential tool for managing risk. However, they also expressed concerns about the funding rates associated with perps, which can add up over time and impact trading costs. One trader, Lucas Krenn, noted that perps are the foundation of his firm's trading activities, particularly for assets outside of bitcoin and ether, where dated futures liquidity is scarce. Another trader, Kenneth Ong, highlighted the benefits of perps for retail traders, including better order execution, lower fees, and the ability to hold both long and short positions simultaneously. Both traders emphasized the importance of margin efficiency in perps, which allows traders to manage risk across multiple venues and tokens with a single pool of capital. The perpetual nature of perps has also shifted price discovery to a 24/7 process, with traders reacting to news and market developments in real-time. Despite the benefits, traders are wary of the funding rates, which can be volatile and difficult to predict. Krenn noted that the funding rate is a greater concern than liquidations, as it can be unquantifiable and unhedgeable. Ong warned that the funding rate can potentially turn a profitable trade into a loss if held for an extended period. The traders also discussed the risks associated with perps, including the socialization of losses during times of market stress. Krenn argued that this is not a problem with perps themselves, but rather with the exchange's margin model. He also pointed out that the distinction between perpetual and dated futures is not as important as the presence of a proper clearing house with a mutualized default fund. Krenn offered an interesting insight into the asymmetry of perp risk, noting that being long is structurally safer due to the ease of arbitraging away positive funding. In contrast, negative funding rates can persist for extended periods, making the short side more risky. The traders concluded that perps have democratized futures trading by providing access, cost efficiency, and margin efficiency, but 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.'