The Double-Edged Sword of Perpetual Futures: Insights from Crypto Traders

When discussing crypto trading with experienced traders, the conversation often revolves around perpetual futures, or 'perps' - a type of derivatives contract that enables 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. However, for traders of alternative cryptocurrencies, perps are often the only viable option for derivatives trading, as dated futures contracts for these assets are typically illiquid. The spot market, on the other hand, is often an afterthought for traders who do not plan to hold onto their assets long-term. To better understand the world of perps, we spoke with traders who have thrived in this market, and their responses were overwhelmingly positive, citing the deep liquidity, low fees, and efficient margin management that perps offer. Nevertheless, traders also expressed concerns about the funding rates associated with perps, which can add up over time and eat into their profits. So, why do traders flock to perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the 'plumbing underneath everything' his firm does, particularly when it comes to trading alternative cryptocurrencies. Krenn notes that dated futures contracts for these assets are often too illiquid to be useful, making perps the go-to option. Another trader, Kenneth Ong, agrees, stating that perps offer better fills, lower fees, and the ability to run both long and short positions simultaneously via hedge mode. This flexibility is a significant advantage over traditional futures contracts, which often require traders to net their positions. Both Krenn and Ong emphasize that margin efficiency is a major draw for perps, as they allow traders to manage risk across multiple venues and assets with greater ease. Perps also facilitate price discovery, as their always-on nature enables traders to react to news and events in real-time, rather than being limited to traditional market hours. However, this flexibility comes with a cost, as traders must contend with funding rates that can be volatile and difficult to predict. According to Krenn, the funding rate is a more significant concern than liquidations, as it can be unquantifiable and unhedgeable. Ong echoes this sentiment, stating that funding rates can 'potentially balloon' and turn a profitable trade into a loss. The traders also touched on the myth of the 'safe trade,' citing the example of the October 10 crash, which triggered widespread deleveraging across both losing and profitable positions. While perps faced criticism in the aftermath, Krenn argues that the issue was not with perps themselves, but rather with the crypto exchange margin model. In his view, the distinction between perpetual and dated futures is less important than the presence of a proper clearing house with a mutualized default fund. Krenn also offered an interesting insight into the asymmetry of perp risk, noting that being long is often the structurally safer side, as positive funding is easier to arbitrage away. In contrast, negative funding rates can persist for extended periods, making it more difficult for traders to short assets. Ultimately, perps have democratized futures trading by providing access to a leveraged market with low fees and efficient margin management. However, traders must be aware of the unique pain points associated with perps, particularly the volatile funding-rate exposure that can be difficult to quantify and hedge.