The Double-Edged Sword of Perpetual Futures in Crypto Trading

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, offering a key advantage over standard futures: no expiry date. For traders of alternative cryptocurrencies, perps are frequently the only viable option for derivatives trading, as dated futures for these assets are often illiquid, and the spot market is primarily used for long-term holdings. To understand what makes perps unique and how they cater to the needs of both institutional and retail traders, CoinDesk spoke with traders who have thrived in the perps market. Their responses highlighted the deep liquidity, low trading fees, and efficient margin use as primary reasons for their popularity. However, traders also expressed concern over the funding rates, which are recurring costs associated with keeping positions open. These rates can add up significantly over time and are seen as a major expense beyond trading fees. The preference for perps over dated futures is largely due to necessity rather than choice. According to Lucas Krenn, a derivatives trader at STS Digital, perps are the foundational tool for crypto-native firms, especially for assets other than Bitcoin and Ether, where dated futures lack liquidity. Kenneth Ong, an independent trader, echoed this sentiment from a retail perspective, citing better order execution, lower fees, and the ability to hold both long and short positions simultaneously as key advantages of perps. Both traders emphasized margin efficiency as a significant draw, allowing for the management of risk across multiple venues and tokens with less capital. The perpetual nature of perps has also shifted price discovery to occur around the clock, not just during traditional market hours. This was evident during the Iran conflict in 2026, where significant price movements occurred over weekends when traditional markets were closed. Despite their advantages, perps come with unique challenges, notably the funding rate, which can be volatile and difficult to predict. This rate, charged every eight hours, exposes traders to floating interest rates without a built-in mechanism to lock in rates, making it a significant concern for long-term positions. The funding rate's unpredictability and the lack of a hedging mechanism against it were highlighted by both Krenn and Ong as major issues. They noted that while perps offer many benefits, including deep liquidity and efficient margin use, the funding rate can potentially turn a profitable trade into a loss if not properly managed. The issue of funding rates is further complicated by the asymmetry in risk between long and short positions. Krenn pointed out that being long is structurally safer because positive funding can be easily arbitraged away, whereas negative funding rates can persist due to difficulties in shorting the underlying token, especially if the circulating supply is small and concentrated. This asymmetry, where the long side has bounded costs but unbounded upside, and the short side has bounded upside but unbounded costs, is not well accounted for in many risk models. In conclusion, while perps have democratized access to futures trading by addressing issues of access, cost, and margin efficiency, they introduce unique challenges, particularly the volatile and unpredictable funding rate exposure. Until a liquid dated curve in crypto emerges, the market will continue to carry an interest rate exposure that is difficult to price and hedge, with funding rates acting as a 'tax' for participation in this leveraged market.