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

When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic that comes up. These derivatives contracts enable traders to control larger positions with less capital, and unlike standard futures, they don't have an expiration date. For altcoin traders, perps are frequently the only viable option for derivatives trading, as dated futures for these assets are often illiquid, and the spot market is typically used for long-term holdings. 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 both institutional and retail traders, and the associated costs of perps trading. The consensus among traders is that perps are favored for their deep liquidity, low trading fees, and efficient margin usage. However, traders also express concerns about funding rates, which are recurring costs for maintaining open positions. Funding rates can be thought of as interest charges that accumulate over time, and traders are worried about the potential impact on their profits. So, why do traders prefer perps? The answer lies in their necessity, particularly for crypto-native firms, where perps are not just one tool among many but the primary instrument for trading. According to Lucas Krenn, a derivatives trader at STS Digital, perps are the 'plumbing underneath everything' the firm does, mainly because dated futures outside of bitcoin and ether are highly illiquid. This lack of liquidity makes it difficult for traders to execute large buy and sell orders at stable prices, resulting in slippage and poor execution. Kenneth Ong, an independent trader, shares a similar perspective, highlighting the benefits of perps for retail traders, including better order fills, lower fees, and the ability to hold both long and short positions simultaneously via hedge mode. Ong notes that this is a significant advantage over regulated venues like the CME, which typically net positions by default. Both Ong and Krenn emphasize that margin efficiency is the primary draw to perps, allowing traders to manage risk effectively across different venues and tokens. Because perps require only a fraction of a position's value as collateral, traders can split their capital across multiple venues and still maintain meaningful positions. The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than just during market hours. Traders like Ong have experienced this firsthand, with significant price movements occurring outside of traditional market hours. Krenn believes that perps will continue to gain traction, particularly in tokenized assets, as they offer a more efficient and cost-effective way to trade. However, both traders caution about the funding rate, which can be a significant burden for traders holding positions over extended periods. The funding rate is unquantifiable at the point of trade and cannot be hedged once the position is open, making it a concern for traders. In conclusion, while perps have democratized futures trading by addressing issues of access, cost, and margin efficiency, they are not without unique challenges, notably the volatile funding-rate exposure that cannot be quantified or hedged. As Krenn puts 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.'