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 unique and attractive option for traders. For altcoin traders, perps are often the only viable derivatives market, as dated futures for these assets are typically illiquid. CoinDesk spoke with traders who have thrived in the perps market to understand what sets them apart from other derivatives and how they cater to both institutional and retail traders. The traders unanimously praised perps for their deep liquidity, low trading fees, and efficient margin usage. However, they also expressed concerns about funding rates, which can add up over time. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the 'plumbing underneath everything' his firm does. Outside of bitcoin and ether, dated futures lack liquidity, making perps the go-to tool for crypto-native firms. Kenneth Ong, an independent trader, echoed this sentiment, highlighting perps' advantages, including better fills, lower fees, and the ability to run both long and short positions simultaneously. Both traders emphasized the importance of margin efficiency in perps, which allows them to manage risk across different venues and tokens. The perpetual nature of perps has also changed the way price discovery occurs, with traders reacting to news and events outside of traditional market hours. While perps offer many benefits, traders are wary of the funding rate, which can be unpredictable and difficult to hedge. Krenn and Ong warned that funding rates can become a significant burden, especially for long-term positions. The traders also addressed the criticism that perps are prone to liquidations, arguing that this is a problem with crypto exchange margin models rather than perps themselves. Krenn pointed out that the key distinction is between facing a proper clearing house with a mutualized default fund or an exchange that socializes losses onto winners. In conclusion, perps have democratized futures trading by solving issues of access, cost, and margin efficiency. Nevertheless, they come with unique challenges, particularly the volatile funding-rate exposure that cannot be quantified or hedged. As Krenn noted, until a liquid dated curve emerges in crypto, the market will continue to carry an interest rate exposure that cannot be priced or hedged.