The Pros and Cons of Perpetual Futures in Crypto Trading

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 larger positions with less capital. Unlike standard futures, perps don't have an 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. Traders praise perps for their deep liquidity, low trading fees, and efficient margin use, which enables them to manage risk across various venues and tokens. However, traders are also concerned about the funding rates, a recurring cost for keeping positions open, which can add up over time. The funding rate is essentially an interest charge that accrues the longer a position is held, and traders are worried about its impact on their profits. According to Lucas Krenn, a derivatives trader at STS Digital, perps are the primary tool for crypto-native firms due to the lack of liquidity in dated futures outside of bitcoin and ether. Kenneth Ong, an independent trader, also prefers perps for their better fills, lower fees, and the ability to run both long and short positions simultaneously. Both traders emphasize the importance of margin efficiency in perps, which allows them to manage risk efficiently across different venues and tokens. The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than just during market hours. However, traders are cautious about the funding rate, which can be a significant burden if not managed properly. Krenn notes that the funding rate is unquantifiable at the point of trade and unhedgeable afterwards, making it a significant concern for traders. Ong warns that the funding rate can potentially balloon to the point where a profitable trade becomes unprofitable. The recent bear market has also highlighted the risks associated with perps, particularly the socialization of losses by exchanges. Krenn argues that the problem lies not with perps themselves, but with the crypto exchange margin model. He emphasizes the importance of facing a proper clearing house with a mutualized default fund, rather than an exchange that socializes losses onto winners. Krenn also points out that being long is the structurally safer side, as positive funding is easy to arbitrage away, while negative funding can persist due to constrained arbitrage. This asymmetry is often not priced correctly in risk models, making it a significant concern for traders. In conclusion, perps have democratized futures trading by solving issues of access, cost, and margin efficiency, but they also come with unique challenges, particularly the volatile funding-rate exposure that can't be quantified or hedged.