The Dual Nature of Perpetual Futures: Insights from Crypto Traders

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 large positions with minimal capital. Unlike standard futures, perps do not have an expiry date, making them a unique and 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. CoinDesk spoke with traders who thrive 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' responses highlighted the deep liquidity, low trading fees, and efficient margin usage of perps. However, they also expressed concerns over funding rates, which are recurring costs for keeping positions open. Funding rates are essentially interest charges that accumulate over time, and traders are worried about their impact on profitability. To understand the appeal of perps, it's essential to consider the limitations of dated futures. According to Lucas Krenn, a derivatives trader at STS Digital, dated futures are often illiquid, making them unsuitable for large trades. In contrast, perps offer better fills, lower fees, and the ability to run both long and short positions simultaneously. Kenneth Ong, an independent trader, echoed Krenn's sentiments, stating that perps provide a significant advantage over traditional futures, particularly for retail traders. Both traders emphasized the importance of margin efficiency in perps, which enables traders to manage risk efficiently across multiple 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. Ong recalled an instance during the Iran conflict, where tokenized oil trading on Hyperliquid saw a significant surge in volume, demonstrating the power of perps in facilitating price discovery. Krenn and Ong also discussed the potential for perps to gain traction in other asset classes, such as commodities and equities. However, they cautioned that the funding rate remains a significant concern, as it can be unpredictable and costly. The traders noted that while liquidations are often cited as a major risk in perps, the funding rate is a more significant issue, as it can be difficult to quantify and hedge. In conclusion, perps have democratized futures trading by providing access, cost efficiency, and margin efficiency. However, they also come with unique challenges, particularly the volatile funding-rate exposure. As Krenn put it, 'Until there is a liquid dated curve in crypto, the whole market is carrying an interest rate exposure it cannot price and cannot hedge.' For now, funding remains the 'tax' that everyone pays for easy access to this leveraged market.