The Double-Edged Sword of Perpetual Futures: Insights from Crypto Traders

When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' inevitably comes up. These derivatives contracts allow traders to control large positions with minimal capital. Unlike standard futures, perps have no expiration date, making them a 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. To understand what makes perps unique, CoinDesk spoke with traders who have thrived in the perpetual futures market. They explained how perps differ from other derivatives, their benefits for institutional and retail traders, and the associated costs. The traders unanimously praised perps for their deep liquidity, low trading fees, and efficient margin usage. However, they also expressed concerns over funding rates, which are recurring costs for keeping positions open. Funding rates can add up over time and are a significant expense for traders. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the foundation of their trading activities. 'Outside of bitcoin and ether, dated futures liquidity is thin to the point of being unusable,' he said. 'Perps are not just one tool among many; for a crypto-native firm, they are the primary tool.' Kenneth Ong, an independent trader, shared a similar perspective, highlighting the benefits of perps for retail traders. Ong explained that perps offer better fills, lower fees, and the ability to run both long and short positions simultaneously via hedge mode. This is a significant advantage over regulated venues like the CME, which typically net positions by default. Ong started trading in the spot market but shifted to perps due to their advantages. For him, the spot market is now primarily for long-term holdings. Both Ong and Krenn emphasized that margin efficiency is a significant draw to perps. With perps, traders can manage risk efficiently across different venues and tokens, as they require only a fraction of the position's value as collateral. The always-on nature of perps has also shifted price discovery to occur around the clock, rather than just during market hours. This was evident during the Iran conflict, when tokenized oil trading on Hyperliquid saw a surge in volume over a weekend. The perpetual nature of perps has also led to the 'perpification' of various assets, with traders expecting this trend to gain momentum in the coming years. However, traders also warned about the risks associated with perps, particularly the funding rate. A dated futures contract provides a clear interest rate, whereas a perpetual futures contract has a funding rate that changes over time and is typically charged every eight hours. This exposes traders to a floating rate, which can become a burden if the market doesn't move as expected. The funding rate can be a significant expense, especially for long-term positions. Krenn and Ong both expressed concerns over the funding rate, with Krenn stating that it is 'unquantifiable at the point of trade and unhedgeable afterwards.' Ong was more blunt, saying that the funding rate 'can potentially balloon to the point where a profitable trade loses money.' The traders also discussed the myth of the 'safe trade,' highlighting the risks associated with perps during times of market volatility. The October 10 crash last year triggered widespread deleveraging, and exchanges socialized losses to protect their systems. Krenn argued that the problem wasn't with perps but rather with the crypto exchange margin model. He emphasized that the distinction between perpetual and dated futures is not the primary concern; instead, it is whether traders are facing a proper clearing house with a mutualized default fund or an exchange that socializes losses onto winners. Krenn also offered an insight that inverts the common assumption about perp risk, stating that being long is the structurally safer side. His logic is that positive funding is easy to arbitrage away, whereas negative funding is more challenging to address. This asymmetry is not accounted for in most risk models, and funding rates can stay extremely high or low for extended periods. The takeaway is that perps have democratized futures trading by solving the problem of access, cost, and margin efficiency. However, they are not without unique pain points, particularly the volatile funding-rate exposure that cannot be quantified or hedged. As Krenn put it, 'Until there is a liquid dated curve in crypto, the whole market is carrying an interest rate exposure it cannot price and cannot hedge.'