The Dual Nature of Perpetual Futures: Benefits and Drawbacks According to Crypto Traders

When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' often arises as a key aspect of their strategy. These derivative contracts enable traders to control larger positions with less capital, offering an advantage over traditional futures with expiry dates. For traders of alternative cryptocurrencies, perps are frequently the only viable option for derivatives trading due to the illiquidity of dated futures and the spot market. CoinDesk consulted with traders who have found success in the perpetual futures market to understand what sets perps apart, how they cater to the needs of both institutional and retail traders, and the associated costs. The traders' responses highlighted the deep liquidity, low trading fees, and efficient margin usage of perps as major attractions. However, they also expressed concerns about funding rates, which are recurring costs for maintaining open positions and can significantly impact trading expenses. The high daily volume of over $200 billion in crypto perps is attributed to necessity rather than choice, as traders rely on them due to the lack of liquidity in dated futures outside of bitcoin and ether. Lucas Krenn, a derivatives trader, and Kenneth Ong, an independent trader, shared their insights on the benefits and drawbacks of perps. They noted that perps offer better fills, lower fees, and the ability to run both long and short positions simultaneously. The perpetual nature of these contracts allows for price discovery to occur at any time, not just during market hours. Nevertheless, the funding rate poses a significant concern, as it can change over time and is typically charged every eight hours, leaving traders exposed to floating rates without a mechanism to lock them in. Both Krenn and Ong emphasized that margin efficiency is a key draw to perps, enabling traders to manage risk efficiently across different venues and tokens. The always-on nature of perps has shifted price discovery, allowing reactions to news to occur immediately, rather than waiting for markets to open. The traders foresee the 'perpification' of various assets gaining momentum, with tokenized oil trading being a preview of what's to come for other commodities. They warned that the funding rate can become a burden if the market doesn't move as expected, potentially turning a profitable trade into a loss. The issue of liquidations and the socialization of losses on exchanges were also discussed, with Krenn arguing that the problem lies in the crypto exchange margin model rather than with perps themselves. He highlighted the importance of facing a proper clearing house with a mutualized default fund. Krenn also pointed out that being long is the structurally safer side, as positive funding can be easily arbitraged away, whereas negative funding can persist due to constrained arbitrage. The asymmetry in risk, with the long side having a bounded cost and unbounded upside, and the short side having a bounded upside and unbounded cost, is often overlooked in risk models. In conclusion, while perps have democratized futures trading by addressing issues of access, cost, and margin efficiency, they are not without unique challenges, particularly the volatile funding-rate exposure that cannot be quantified or hedged.