The Double-Edged Sword of Perpetual Futures in Crypto Trading

When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic that comes up. These derivatives contracts enable traders to control large positions with minimal capital. Unlike standard futures, perps do not have an expiration date, making them a popular choice among traders. For altcoin traders, perps are often the only viable option for derivatives trading, as dated futures contracts for these assets are typically illiquid. The spot market is also not a viable option for short-term trading, as it is mostly used for long-term holdings. CoinDesk spoke with traders who have thrived in the perps market to understand what makes them unique and how they cater to the needs of both institutional and retail traders. The traders unanimously agreed that perps offer deep liquidity, low trading fees, and efficient margin usage, making them an attractive option. However, they also expressed concerns over funding rates, which can add up over time and eat into traders' profits. Funding rates are essentially interest charges that accrue over time, and traders are worried about how these rates can impact their bottom line. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the 'plumbing underneath everything' the firm does. Outside of bitcoin and ether, dated futures contracts are often too illiquid to be useful, making perps the go-to option. Krenn explained that dated futures contracts have to be replaced with new contracts at expiry, which can be costly. This is also why futures-based ETFs are often less efficient than spot ETFs. Perps, on the other hand, offer better liquidity, allowing traders to buy and sell large quantities without significantly impacting the market price. Kenneth Ong, an independent trader, shared a similar perspective, citing the benefits of perps for retail traders. Ong explained that perps offer better fills, lower fees, and the ability to run both long and short positions simultaneously. This is particularly useful for traders who want to hedge their bets or take advantage of price discrepancies. Both Krenn and Ong emphasized the importance of margin efficiency in perps. Since perps require only a fraction of the position's value as collateral, traders can split their capital across multiple venues and tokens, managing risk more efficiently. The perpetual nature of perps has also shifted price discovery to a 24/7 process, rather than being limited to traditional market hours. This has led to a more dynamic and responsive market, where prices can adjust in real-time to new information. However, this also means that traders are exposed to funding rates, which can be volatile and unpredictable. Krenn and Ong both expressed concerns over funding rates, which can add up over time and impact traders' profits. They noted that funding rates can be difficult to quantify and hedge, making them a unique pain point for perps traders. Despite these concerns, both traders believe that perps will continue to gain momentum in the coming years, particularly as more assets become tokenized. They predict that the 'perpification' of various assets will lead to increased liquidity and efficiency, making it easier for traders to access and trade these assets. However, they also caution that funding rates will remain a key challenge for traders to navigate. In conclusion, perps have democratized futures trading by providing access to a leveraged market with low fees and efficient margin usage. However, they also come with unique challenges, particularly with regards to funding rates. As the crypto market continues to evolve, it is essential for traders to understand the benefits and drawbacks of perps and develop strategies to navigate these challenges.