The Double-Edged Sword of Perpetual Futures in Crypto Trading

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. For altcoin traders, perps are often the only viable option for derivatives trading, as dated futures for these tokens are typically illiquid. CoinDesk spoke with traders who have thrived in the perpetual futures market to understand what sets perps apart from other derivatives, how they cater to the needs of institutional and retail traders, and the associated costs. 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 profits. 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, as they provide a necessary tool for crypto-native firms. Krenn explained that dated futures are not a viable option due to their illiquidity and the costs associated with replacing them at expiry. Another trader, Kenneth Ong, highlighted the benefits of perps from a retail trader's perspective, citing better fills, lower fees, and the ability to run both long and short positions simultaneously. Ong noted that perps offer a significant advantage over regulated venues like the CME, where accounts are typically netted by default. Both Krenn and Ong emphasized that margin efficiency is a major draw for perps, as they allow traders to manage risk efficiently across different venues and tokens. The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than just during market hours. This has led to increased trading activity in tokenized commodities, such as oil, which can react to news and events in real-time. However, traders are also wary of the funding rate, which can be a significant burden for those holding positions for extended periods. Krenn and Ong warned that the funding rate can 'balloon' and turn a profitable trade into a loss. The funding rate is typically charged every eight hours and can be volatile, making it difficult for traders to quantify and hedge. 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 noted that dated futures on the same venues are subject to the same insurance funds and deleveraging queues. Krenn also offered an interesting insight into the asymmetry of perp risk, suggesting that being long is the structurally safer side due to the ease of arbitraging away positive funding. However, when the funding rate is negative, the arbitrage becomes more difficult, and the gap between perp and spot prices can persist. This asymmetry is often overlooked in risk models, and Krenn cited the example of lending protocol Euler's token, where funding on the perp went deeply negative due to a small and concentrated float. In conclusion, perps have democratized futures trading by solving issues of access, cost, and margin efficiency, but they also come with unique challenges, particularly the volatile funding-rate exposure that cannot be quantified or hedged.