The Pros and Cons 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 allow traders to control large positions with minimal capital. Perps work similarly to standard futures but have no expiration date. For traders of alternative cryptocurrencies, perps are often the only derivatives option available due to illiquid dated futures and spot markets. CoinDesk spoke with traders who have thrived in the perpetual futures market to understand what makes perps unique and how they cater to the needs of both institutional and retail traders. The traders praised perps for their deep liquidity, low trading fees, and efficient margin usage. However, they also expressed concerns about funding rates, which are recurring costs for keeping positions open. Funding rates can add up over time and are a significant expense for traders. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the primary tool for crypto-native firms due to their liquidity and efficiency. Dated futures, on the other hand, are often illiquid and require costly replacements at expiration. Kenneth Ong, an independent trader, highlighted the benefits of perps for retail traders, including better fills, lower fees, and the ability to run both long and short positions simultaneously. Both Krenn and Ong emphasized the importance of margin efficiency in perps, which allows traders to manage risk efficiently across different venues and tokens. Perps have also changed the way price discovery occurs, with traders reacting to news and events outside of traditional market hours. The always-on nature of perps has led to increased liquidity and more efficient price discovery. However, perps also come with unique challenges, such as funding rate exposure, which can be difficult to quantify and hedge. Traders are concerned about the impact of funding rates on their profits, particularly when holding positions for extended periods. The funding rate can become a significant burden, and traders must carefully consider this cost when trading perps. In conclusion, perps have democratized futures trading by providing access to leveraged markets, but they also come with unique pain points, such as funding rate exposure. As the crypto market continues to evolve, it is essential for traders to understand the benefits and drawbacks of perps and to develop strategies to manage their risks effectively.