The Double-Edged Nature of Perpetual Futures in Crypto Trading

When discussing crypto trading with experienced traders, the conversation often revolves around perpetual futures, or 'perps'. These derivatives contracts enable traders to control large positions with minimal capital. Unlike standard futures, perps do not have an expiration date, making them a unique and popular choice among traders. For altcoin traders, perps are often the only viable option for derivatives trading due to the illiquidity of dated futures and the spot market. CoinDesk spoke with successful perps traders to explore the advantages and disadvantages of this market. The traders praised perps for their deep liquidity, low trading fees, and efficient margin usage. However, they also expressed concerns about the funding rates, which can add up over time and impact trading costs. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the primary tool for crypto-native firms due to the lack of liquidity in dated futures. Kenneth Ong, an independent trader, shared a similar perspective, highlighting the benefits of perps for retail traders, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Both traders emphasized the importance of margin efficiency in perps, which allows for greater trading exposure with minimal capital. The perpetual nature of perps has also shifted price discovery, enabling traders to react to news and events outside traditional market hours. Ong cited the example of tokenized oil trading during the Iran conflict, where perps allowed for rapid price adjustments. Krenn noted that perps have become a powerful tool for trading various assets, sidestepping the need for traditional infrastructure. Despite the benefits, traders are wary of the funding rate, which can be unpredictable and burdensome. Krenn and Ong warned that the funding rate can become a significant expense, especially for long-term positions. The lack of a built-in mechanism to lock in the funding rate exposes traders to floating rates, making it challenging to quantify and hedge. The traders also addressed the criticism of perps following the October 10 crash, which led to widespread deleveraging and liquidations. Krenn argued that the issue was not with perps themselves but rather with the crypto exchange margin model. He emphasized the importance of proper clearing houses and mutualized default funds. Krenn also offered an interesting insight into the asymmetry of perp risk, suggesting that being long is structurally safer due to the ease of arbitraging away positive funding. However, when the funding rate is negative, the arbitrage becomes more complex, and the gap between perp and spot prices can persist. In conclusion, perps have democratized futures trading by providing access, cost efficiency, and margin efficiency. Nevertheless, traders must be aware of the unique challenges, particularly the volatile funding-rate exposure, which can be difficult to quantify and hedge.