The Double-Edged Sword of Perpetual Futures in Crypto Trading

When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' inevitably comes up. These derivatives contracts allow traders to control larger positions with less capital, but they also introduce unique challenges. Perps work similarly to standard futures, but without an expiration date. For traders of alternative cryptocurrencies, perps are often the only viable option for derivatives trading, as dated futures for these assets are typically illiquid. The spot market, on the other hand, is often an afterthought for traders who don't plan to hold onto their assets long-term. To better understand the role of perps in crypto trading, we spoke with traders who have found success in this market. They cited the deep liquidity, low trading fees, and efficient margin usage as key advantages of perps. However, they also expressed concerns about the 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' his firm does. Outside of bitcoin and ether, dated futures liquidity is often too thin to be useful, making perps the go-to tool for many traders. Kenneth Ong, an independent trader, echoed this sentiment, noting that perps offer better fills, lower fees, and the ability to run both long and short positions simultaneously. One of the primary advantages of perps is their ability to provide efficient margin usage. 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. This is particularly important for traders who need to manage risk across different assets and exchanges. Perps have also changed the way price discovery works in the crypto market. With perps, price discovery can occur at any time, not just during traditional market hours. This has led to a shift in the way traders approach the market, with many now focusing on perps as a key tool for managing risk and making trades. However, perps also introduce unique challenges, particularly when it comes to funding rates. Funding rates can be volatile and difficult to predict, making it challenging for traders to manage their risk. According to Krenn and Ong, the funding rate is a major concern for traders, as it can add up over time and eat into profits. In fact, Krenn noted that the funding rate is 'unquantifiable at the point of trade and unhedgeable afterwards,' making it a significant risk for traders. Despite these challenges, perps remain a popular tool for crypto traders. As the market continues to evolve, it's likely that perps will play an increasingly important role in the way traders manage risk and make trades. However, it's essential for traders to carefully consider the unique challenges and risks associated with perps, particularly when it comes to funding rates and margin efficiency. By understanding these risks and challenges, traders can better navigate the crypto market and make more informed decisions about their trades.