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

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. Unlike standard futures, perps do not have an expiry date, making them a unique tool in the crypto market. For traders of alternative cryptocurrencies, perps may be the only viable option for derivatives trading due to the illiquidity of dated futures and the spot market. CoinDesk spoke with traders who have thrived 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 unanimously agreed that perps are favored for their deep liquidity, low trading fees, and efficient margin usage. However, they also expressed concerns about the funding rates, which are recurring costs for maintaining open positions. Funding rates can be thought of as interest charges that accumulate over time. The traders interviewed, including Lucas Krenn from STS Digital and independent trader Kenneth Ong, emphasized that perps are not just one tool among many but a fundamental component of their trading strategies. Krenn noted that outside of bitcoin and ether, dated futures lack liquidity, making perps the primary choice for crypto-native firms. Ong, who has been trading for six years, highlighted the benefits of perps for retail traders, including better order execution, lower fees, and the ability to hold both long and short positions simultaneously through hedge mode. Both traders praised the margin efficiency of perps, which allows for greater trading exposure with less capital. They also discussed how perps have changed the landscape of price discovery, enabling it to occur at any time, not just during traditional market hours. The always-on nature of perps has led to a shift in how news and events impact markets, with significant price movements happening outside of traditional trading sessions. Despite the advantages, the traders warned about the risks associated with perps, particularly the funding rates. Unlike dated futures, where the interest rate is known upfront, perpetual futures contracts have funding rates that change over time and are typically charged every eight hours. This exposes traders to a floating rate that cannot be locked in, making it a significant concern. Krenn and Ong stressed that the funding rate is not just a minor fee but can potentially turn a profitable trade into a loss if held for an extended period. The traders also addressed the criticism of perps following the October 10 crash, which led to widespread deleveraging and liquidations. Krenn argued that the issue was not with perps themselves but with the crypto exchange margin model. He emphasized the importance of distinguishing between perpetual and dated futures and the need for a proper clearing house with a mutualized default fund. Krenn offered an interesting insight into the risk asymmetry of perps, suggesting that being long is structurally safer due to the ease of arbitraging away positive funding rates. However, when funding rates are negative, the arbitrage process is more complex, leading to a persistent gap between perp and spot prices. This asymmetry is often not accounted for in risk models. In conclusion, while perps have democratized access to futures trading by addressing issues of access, cost, and margin efficiency, they also come with unique challenges, particularly the volatile funding-rate exposure. As Krenn noted, until a liquid dated curve in crypto is established, the market will continue to carry an interest rate exposure that cannot be priced or hedged, making funding a 'tax' for participating in this leveraged market.