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, but they also come with unique risks and challenges. To better understand the world of perps, CoinDesk spoke with traders who have thrived in this market, including Lucas Krenn, a derivatives trader at STS Digital, and Kenneth Ong, an independent trader with extensive experience in perps. According to Krenn, perps are the 'plumbing underneath everything' his firm does, particularly for altcoins, where dated futures liquidity is scarce. Ong, who has shifted most of his trading activity to perps, highlights their advantages, including better fills, lower fees, and the ability to run both long and short positions simultaneously via hedge mode. However, both traders express concern over funding rates, which can add up over time and become a significant burden, especially for long-term positions. Unlike dated futures contracts, which have a fixed interest rate, perps have a funding rate that changes over time, typically charged every eight hours. This exposes traders to a floating rate, which can be difficult to quantify and hedge. The lack of a liquid dated curve in crypto means the market is carrying an interest rate exposure it cannot price or hedge, making funding a 'tax' everyone pays for access to this leveraged market. Despite these challenges, perps have democratized futures trading, offering a unique combination of liquidity, efficiency, and flexibility that has attracted both retail and institutional traders. As the crypto market continues to evolve, the importance of understanding perps and their intricacies will only grow, especially for those looking to navigate the complexities of funding rates and margin efficiency.