The Double-Edged Sword 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 enable traders to control large positions with minimal capital. Unlike standard futures, perps do not have an expiration date, making them a popular choice among traders. For altcoin traders, perps are often the only viable option for derivatives trading, as dated futures for these assets are typically illiquid. The spot market, on the other hand, is often an afterthought for traders who do not plan to hold onto their assets long-term. To better understand the world of perps, CoinDesk spoke with traders who have thrived in this market, exploring what makes perps unique, how they cater to the needs of both institutional and retail traders, and the costs associated with perps trading. The traders' responses were overwhelmingly positive, citing the deep liquidity, low trading fees, and efficient margin usage as major advantages. However, they also expressed concerns about the funding rates, which can add up over time and eat into their profits. So, why do traders flock to perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the backbone of the crypto trading ecosystem. 'Outside of bitcoin and ether, dated futures liquidity is virtually non-existent,' he explained. 'Perps are not just one tool among many; for crypto-native firms, they are the primary tool.' Krenn attributed the lack of popularity of dated futures to the costs associated with replacing expiring contracts. This, in turn, makes futures-based ETFs less efficient than their spot-based counterparts. Kenneth Ong, an independent trader, echoed Krenn's sentiments, highlighting the benefits of perps for retail traders. Ong noted that perps offer better execution prices, lower fees, and the ability to run both long and short positions simultaneously. This, he argued, is a significant advantage over traditional futures markets, where a single account is often netted by default. Ong, who started his trading career in the spot market, eventually shifted his focus to perps due to their superior liquidity and margin efficiency. Both Krenn and Ong emphasized the importance of margin efficiency in perps trading, allowing traders to manage risk across multiple venues and assets with minimal capital. The always-on nature of perps has also shifted the dynamics of price discovery, enabling traders to react to news and events in real-time, rather than waiting for traditional market hours. Ong recalled a recent example of this, where the price of tokenized oil surged during a weekend, only to see the traditional market play catch-up on Monday. Krenn sees this trend continuing, with perps becoming an increasingly important tool for traders looking to access new asset classes. However, both traders cautioned about the risks associated with funding rates, which can be unpredictable and costly. Krenn noted that, unlike dated futures, perps have a funding rate that changes over time, leaving traders exposed to floating rates and potential losses. Ong was more blunt, stating that funding rates can 'balloon' and turn a profitable trade into a losing one. 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 winners. He emphasized the importance of facing a proper clearing house with a mutualized default fund, rather than an exchange that socializes losses. In a surprising twist, Krenn revealed that being long is often the structurally safer side in perps trading, as positive funding can be easily arbitraged away. However, when funding rates are negative, the arbitrage becomes more complex, and the gap between perp and spot prices can persist, leading to extremely negative funding rates. As the crypto market continues to evolve, it is clear that perps will play a significant role in shaping the future of trading. While they offer many benefits, including democratized access to futures trading, they also come with unique challenges, such as 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 rates remain the 'tax' that everyone pays for easy access to this leveraged market.