The Double-Edged Sword of Perpetual Futures: Benefits and Drawbacks According to Crypto Traders

When discussing crypto trading, savvy traders often bring up perpetual futures, or 'perps,' which are derivatives contracts allowing traders to control larger positions with less capital. Unlike standard futures, perps have no expiry 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 coins are typically illiquid. CoinDesk spoke with traders who have found success in the perpetual futures market to understand what sets perps apart, how they cater to both institutional and retail traders, and the associated costs. The traders unanimously praised perps for their deep liquidity, low trading fees, and efficient margin usage, which enables significant trading exposure with minimal collateral. However, they also expressed concerns over funding rates, a recurring cost for maintaining open positions. Funding rates can be thought of as an interest charge that accrues over time, and traders are worried about the potential impact on their profits. To understand the appeal of perps, it's essential to consider the limitations of dated futures. Lucas Krenn, a derivatives trader at STS Digital, explained that outside of bitcoin and ether, dated futures lack liquidity, making perps the primary tool for crypto-native firms. The illiquidity of dated futures stems from the need to replace contracts at expiry, which incurs additional costs. In contrast, perps offer better liquidity, allowing for more efficient trading and reduced slippage. Kenneth Ong, an independent trader, highlighted the benefits of perps from a retail trader's perspective, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Ong noted that perps have become his primary focus, with spot trading now mainly used for long-term holdings. Both Krenn and Ong emphasized the importance of margin efficiency in perps, which enables traders to manage risk more effectively across different venues and tokens. The perpetual nature of perps has also shifted price discovery, allowing traders to react to news and events in real-time, rather than being limited to traditional market hours. The traders discussed the potential for perps to expand into new asset classes, such as tokenized oil and equities, which could further increase liquidity and efficiency. However, they also warned about the risks associated with funding rates, which can be unpredictable and difficult to hedge. Krenn and Ong cautioned that funding rates can become a significant burden, particularly for traders holding positions over extended periods. The funding rate is typically charged every eight hours and can fluctuate over time, making it challenging for traders to quantify and manage their exposure. The traders also addressed the criticism that perps are inherently risky, citing the example of 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 profitable traders. He emphasized that the key distinction is not between perpetual and dated futures but rather between exchanges with proper clearing houses and mutualized default funds and those that socialize losses. Krenn also offered an interesting insight into the asymmetry of perp risk, suggesting that being long is structurally safer due to the ability to arbitrage away positive funding rates. However, when funding rates are negative, the arbitrage process is more complex, and the gap between perp and spot prices can persist, leading to prolonged periods of negative funding rates. In conclusion, while perps have democratized futures trading by addressing issues of access, cost, and margin efficiency, they also introduce unique challenges, such as volatile funding-rate exposure. As Krenn noted, until a liquid dated curve emerges in crypto, the market will continue to carry an interest rate exposure that is difficult to price and hedge.