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 derivative contract that allows traders to control large positions with minimal capital. Perps function similarly to standard futures but lack an expiry 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 are frequently illiquid. In a conversation with CoinDesk, traders who have thrived in the perpetual futures market shared their insights on what sets perps apart from other derivatives, how they cater to the needs of institutional and retail traders, and the costs associated with perps trading. The traders' responses were overwhelmingly positive, citing perps' deep liquidity, low trading fees, and efficient margin usage as key advantages. However, they also expressed concerns over funding rates, which can add up over time and impact trading profits. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the foundation of his firm's operations, particularly for altcoins, where dated futures contracts are often too illiquid to be useful. Krenn explained that the process of replacing dated futures contracts at expiry is costly, which is why futures-based ETFs tend to be less efficient than spot ETFs. Kenneth Ong, an independent trader, shared a similar perspective, highlighting perps' ability to offer better fills, lower fees, and the option to run both long and short positions simultaneously via hedge mode. Ong noted that this is a significant advantage over regulated venues like CME, where a single account is typically netted by default. Both Ong and Krenn emphasized that margin efficiency is a major draw for perps, as they require only a fraction of a position's value as collateral, allowing traders to split their capital across multiple venues and tokens. The perpetual nature of perps has also shifted price discovery, enabling traders to react to news and events in real-time, rather than waiting for markets to open. Ong recalled an instance during the Iran conflict, where tokenized oil trading on Hyperliquid saw a significant surge in volume, with the majority of the price reaction occurring on crypto/tokenized commodity perps while traditional markets were closed. Krenn sees this mechanism playing out in perps tied to other traditional assets, such as tokenized equities, which can sidestep the complexities of recreating traditional share ownership on-chain. However, traders also warned about the risks associated with perps, particularly the funding rate, which can be a significant burden for traders who hold positions for extended periods. Krenn described the funding rate as 'unquantifiable' and 'unhedgeable,' making it a major concern for traders. Ong was more blunt, stating that the funding rate can potentially turn a profitable trade into a loss. The traders also addressed the criticism that perps faced during the October 10 crash, which triggered widespread deleveraging across the market. Krenn argued that the issue was not with perps themselves but rather with the crypto exchange margin model, which socializes losses onto winners. He emphasized that the key distinction is not between perpetual and dated futures but between facing a proper clearing house with a mutualized default fund or an exchange that socializes losses. Krenn also offered an interesting insight into the asymmetry of perp risk, suggesting that being long is the structurally safer side, as positive funding is easy to arbitrage away. However, when the funding rate is negative, the arbitrage is more challenging, and the gap between perp and spot prices can persist, leading to extremely negative funding rates. In conclusion, perps have democratized futures trading by providing access, cost-effectiveness, 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.'