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 allow traders to control larger positions with less capital, and they have become a staple in the crypto market. Unlike standard futures, perps do not have an expiry 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 tokens are typically illiquid. The spot market is also not a viable option for short-term trading, as it is mostly used for long-term holdings. Traders who have thrived in the perps market cite their deep liquidity, low trading fees, and efficient margin usage as major advantages. However, they also express concerns over funding rates, which can add up quickly and eat into profits. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the 'plumbing underneath everything' his firm does. 'Outside bitcoin and ether, dated futures liquidity is thin to the point of being unusable,' he said. 'So perps are not one tool among several. For a crypto native firm, they are the tool.' Kenneth Ong, an independent trader, echoes this sentiment, stating that perps offer better fills, lower fees, and the ability to run both long and short positions simultaneously. Both traders agree that margin efficiency is a major draw to perps, as they allow traders to manage risk efficiently across different venues and tokens. The always-on nature of perps has also shifted price discovery to occur whenever news breaks, rather than just during market hours. However, traders are wary of the funding rate, which can change over time and is typically charged every eight hours. This can make it difficult for traders to quantify and hedge their exposure, leaving them vulnerable to potential losses. As Krenn put it, 'It is unquantifiable at the point of trade and unhedgeable afterwards.' Ong is more blunt, stating that 'if you hold positions for long periods, it can potentially balloon to the point where a profitable trade loses money.' Despite these concerns, perps remain a popular choice among traders, and their use is expected to continue growing in the coming years. As Ong said, 'it kills one of the last reasons to bother with dated futures at all.' However, traders must be aware of the unique pain points associated with perps, including volatile funding-rate exposure that can't be quantified or hedged.