The Dual Nature of Perpetual Futures in Crypto Trading

When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' often comes up. These derivatives contracts allow traders to control large positions with minimal capital. While they share similarities with standard futures, perps have no expiration date, making them a unique and popular choice among traders. For altcoin traders, perps are often the only viable option for derivatives trading, as dated futures contracts 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 their positions long-term. Traders who have found success in the perpetual futures market attribute their success to the deep liquidity, low trading fees, and efficient margin usage that perps offer. However, they also express concern over the funding rates associated with perps, which can add up over time and eat into their profits. The funding rate, which is essentially an interest charge, is a recurring cost that traders must consider when holding positions open. According to Lucas Krenn, a derivatives trader at STS Digital, perps are not just one tool among many, but rather the primary tool for crypto-native firms. Krenn notes that dated futures contracts are often illiquid, making it difficult for traders to enter or exit positions without significantly affecting the market price. In contrast, perps offer better fills, lower fees, and the ability to run both long and short positions simultaneously. Kenneth Ong, an independent trader, echoes Krenn's sentiments, citing the advantages of perps in terms of margin efficiency and the ability to trade with leverage. Ong also notes that the funding rate is a significant concern, as it can become a burden if the market doesn't move in the expected direction. The always-on nature of perps has also shifted the landscape of price discovery, allowing traders to react to news and events in real-time, rather than waiting for traditional market hours. However, this also means that traders are exposed to the funding rate, which can change over time and is typically charged every eight hours. As Krenn puts it, the funding rate is 'unquantifiable at the point of trade and unhedgeable afterwards.' Despite the benefits of perps, traders must be aware of the unique pain points associated with these contracts, including the volatile funding-rate exposure that can't be quantified or hedged. As the crypto market continues to evolve, it's likely that perps will remain a popular choice among traders, but it's essential to understand the risks and challenges associated with these contracts.