The Pros and Cons of Perpetual Futures in Crypto Trading

When discussing cryptocurrency trading with experienced traders, the topic of perpetual futures, or 'perps,' inevitably arises. These derivatives contracts enable traders to control larger positions with less capital, but they also come with unique challenges. Unlike standard futures, perps have no expiration date, making them a popular choice among traders. However, their popularity raises concerns about funding rates, which can significantly impact trading costs. To better understand the world of perps, we spoke with traders who have thrived in this market, including Lucas Krenn, a derivatives trader at STS Digital, and Kenneth Ong, an independent trader. They shared their insights on what makes perps different, how they facilitate efficient trading, and the costs associated with them. One of the primary advantages of perps is their deep liquidity, which allows for cheap trading fees and efficient margin management. This is particularly important for institutional traders, who require access to large amounts of liquidity to execute their trades. However, perps also come with a recurring cost, known as funding rates, which can add up over time. Funding rates are essentially interest charges that accrue the longer a position is held, and they can be a significant concern for traders. According to Krenn and Ong, funding rates are a major issue in the perps market, as they can be difficult to quantify and hedge. This can lead to unexpected costs and reduced profitability for traders. Despite these challenges, perps remain a popular choice among traders, particularly those who trade altcoins. For these traders, perps often represent the only viable option for derivatives trading, as dated futures contracts for altcoins are frequently illiquid. The perpetual nature of perps also allows for more flexible trading strategies, including the ability to hold both long and short positions simultaneously. This is particularly useful for traders who want to hedge their bets or speculate on price movements. Another significant advantage of perps is their ability to facilitate price discovery. Because perps are always 'on,' they allow traders to react to news and market developments in real-time, rather than waiting for traditional markets to open. This has led to the emergence of new trading strategies, such as tokenized oil trading, which has seen significant growth in recent months. However, the perps market is not without its risks. One of the primary concerns is the potential for liquidations, which can occur when a trader's margin is depleted. This can lead to significant losses, particularly if the market moves against the trader. To mitigate this risk, traders must carefully manage their positions and adjust their strategies accordingly. In conclusion, perpetual futures have democratized access to the futures market, offering traders a unique combination of liquidity, flexibility, and leverage. However, they also come with distinct challenges, particularly with regards to funding rates. As the market continues to evolve, it is essential for traders to understand these risks and develop strategies to manage them effectively. By doing so, they can unlock the full potential of perps and achieve their trading goals.