The Pros and Cons 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 larger positions with less capital, but they also come with unique challenges. To understand what makes perps different from other derivatives and how they cater to both institutional and retail traders, we spoke with traders who have thrived in the perpetual futures market. They highlighted the advantages of perps, including their deep liquidity, low trading fees, and efficient margin usage. However, they also expressed concerns about the funding rates, which can add up over time and affect trading profits. We delved into the reasons behind the popularity of perps, the benefits they offer to traders, and the potential risks associated with funding rates. According to Lucas Krenn, a derivatives trader at STS Digital, perps are the primary tool for crypto-native firms, as they provide a more efficient way to trade than traditional dated futures. Kenneth Ong, an independent trader, also emphasized the advantages of perps, including better fills, lower fees, and the ability to run both long and short positions simultaneously. Both traders noted that margin efficiency is a significant draw to perps, as they allow traders to manage risk more effectively across different venues and tokens. The always-on nature of perps has also shifted price discovery, enabling traders to react to news and events in real-time. Nevertheless, the funding rate remains a significant concern, as it can be unpredictable and difficult to hedge. As Krenn pointed out, the funding rate is 'unquantifiable at the point of trade and unhedgeable afterwards,' making it a potential burden for traders. Despite these challenges, perps continue to gain popularity, and their impact on the crypto market is likely to grow in the coming years. As Ong noted, the tokenization of commodities and equities is expected to increase, making perps an essential tool for traders. In conclusion, while perps offer many benefits, including deep liquidity and efficient margin usage, they also come with unique risks, such as volatile funding-rate exposure. As the crypto market continues to evolve, it is crucial for traders to understand the pros and cons of perps and develop strategies to mitigate their risks.