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,' often comes up. These derivatives contracts allow traders to control larger positions with less capital, but they also have no expiration date, distinguishing them from standard futures. For traders of alternative cryptocurrencies, perps may be the only viable option for derivatives trading, as dated futures for these coins are often illiquid, and the spot market is not a priority for those who don't plan to hold their assets long-term. CoinDesk spoke with traders who have found success in the perpetual futures market to understand what sets perps apart from other derivatives, how they meet the needs of institutional and retail traders, and the costs associated with perps trading. The traders' responses highlighted the advantages of perps, including their deep liquidity, low trading fees, and high margin efficiency, which refers to the amount of trading exposure achievable per unit of collateral. However, they also expressed concerns about funding rates, a recurring cost for maintaining open positions, which can add up over time. 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, given the lack of liquidity in dated futures outside of bitcoin and ether. Krenn noted that dated futures are less popular due to the costs associated with replacing them at expiration, which also affects the efficiency of futures-based ETFs. Kenneth Ong, an independent trader, shared a similar perspective, emphasizing 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. Ong started in the spot market but shifted to perps after realizing their advantages, now using spot primarily for long-term holdings. Both Ong and Krenn cited margin efficiency as a key draw to perps, allowing traders to manage risk efficiently across different venues and tokens. The perpetual nature of perps has also changed the dynamics of price discovery, which now occurs around the clock, rather than only during market hours. This was evident during the Iran conflict, when tokenized oil trading on Hyperliquid experienced a surge in volume over a weekend, with much of the price reaction happening before traditional markets opened. The traders also discussed the potential for perps to expand into new asset classes, with Krenn noting that building tokenized equity products is challenging due to regulatory and operational requirements, but perps can sidestep these issues. However, they also warned about the risks associated with perps, particularly the funding rate, which can be a significant burden for traders who hold positions for extended periods. Unlike dated futures contracts, which have a fixed interest rate, perpetual futures contracts have a funding rate that changes over time and is typically charged every eight hours, leaving traders exposed to a floating rate with no mechanism to lock it in. Krenn and Ong emphasized that this funding rate can be a major concern, as it can potentially turn a profitable trade into a loss if not managed properly. The traders also addressed the criticism of perps following the October 10 crash, which triggered widespread deleveraging and liquidations. Krenn argued that the issue was not with perps themselves, but rather with the crypto exchange margin model, which socializes losses onto winners. He noted that dated futures on the same venues face the same risks, and the key distinction is whether a trader is facing a proper clearing house with a mutualized default fund or an exchange that socializes losses. Krenn also offered an insight into the asymmetry of perp risk, suggesting that being long is the structurally safer side, as positive funding is easy to arbitrage away, whereas negative funding can persist due to constraints on arbitrage. This asymmetry, he noted, is not adequately accounted for in most risk models. In conclusion, while perps have democratized futures trading by addressing issues of access, cost, and margin efficiency, they also come with unique challenges, particularly the volatile funding-rate exposure that cannot be quantified or hedged. As Krenn put it, the whole market is carrying an interest rate exposure that it cannot price or hedge, making funding a 'tax' that everyone pays for easy access to this leveraged market.