The Double-Edged Nature of Perpetual Futures in Crypto Trading

When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic that comes up. These derivatives contracts allow traders to control large positions with minimal capital, offering a key advantage over traditional futures: they never expire. For bitcoin and ether traders, perps are just one of many derivatives options available, but for traders of other altcoins, they are often the only viable choice due to the illiquidity of dated futures and spot markets. CoinDesk spoke with traders who have thrived in the perps market to understand what sets them apart, how they cater to both institutional and retail traders, and the associated costs. The consensus among traders is that perps are attractive due to their deep liquidity, low trading fees, and efficient margin usage, which enables significant trading exposure with minimal collateral. However, traders are also concerned about funding rates, a recurring cost for maintaining open positions that can add up over time. So, why do traders prefer perps? The answer lies in their necessity, particularly for altcoins, where dated futures are often too illiquid to be useful. Lucas Krenn, a derivatives trader, notes that perps are not just one tool among many but the primary instrument for crypto-native firms, given the lack of liquidity in dated futures outside of bitcoin and ether. Kenneth Ong, an independent trader, echoes this sentiment, highlighting perps' advantages for retail traders, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Both traders emphasize the importance of margin efficiency in perps, which allows for greater leverage and more efficient risk management across different venues and tokens. The perpetual nature of perps has also shifted price discovery, enabling it to occur at any time, not just during traditional market hours. This has been observed in the tokenized oil trading market, where significant price movements have occurred outside of traditional market hours. Despite their advantages, perps are not without challenges, particularly regarding funding rates, which can be a significant burden for traders. Unlike dated futures, where the interest rate is known upfront, perps have a funding rate that changes over time, typically charged every eight hours, leaving traders exposed to floating rates without a mechanism to lock them in. This can lead to unforeseen costs, especially for long-term positions. The issue of funding rates is further complicated by the lack of liquidity in certain markets, making it difficult for traders to hedge their positions effectively. In conclusion, while perps have democratized futures trading by addressing issues of access, cost, and margin efficiency, they also introduce unique challenges, such as volatile funding-rate exposure. As the crypto market continues to evolve, it is essential for traders to understand these complexities and adapt their strategies accordingly.