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 large positions with minimal capital. Unlike standard futures, perps do not have an expiration date, making them a unique and attractive option for traders. For altcoin traders, perps are often the only viable avenue for derivatives trading, as dated futures for these assets are typically illiquid. CoinDesk spoke with traders who have thrived in the perps market to understand what sets them apart from other derivatives and how they cater to the needs of both institutional and retail traders. The traders unanimously praised perps for their deep liquidity, low trading fees, and efficient margin usage. However, they also expressed concerns about the funding rates associated with perps, which can add up over time and impact trading costs. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the backbone of his firm's operations. 'Outside of bitcoin and ether, dated futures liquidity is thin to the point of being unusable,' he said. 'Perps are not just one tool among many; for a crypto-native firm, they are the primary tool.' Kenneth Ong, an independent trader, echoed this sentiment, highlighting the benefits of perps for retail traders, including better fills, lower fees, and the ability to run both long and short positions simultaneously. Both Krenn and Ong emphasized the importance of margin efficiency in perps, which allows traders to manage risk effectively across different venues and tokens. Perps have also changed the way price discovery occurs, with trading happening around the clock, rather than just during market hours. This has led to a shift in how news and events impact markets, with perps reacting quickly to new information. While perps offer many advantages, they also come with unique challenges, particularly regarding funding rates. Unlike dated futures, which have a fixed interest rate, perps have a funding rate that changes over time and is typically charged every eight hours. This exposes traders to a floating rate, making it difficult to quantify and hedge against. As Krenn noted, 'It is unquantifiable at the point of trade and unhedgeable afterwards.' Ong also expressed concern about the potential for funding rates to 'balloon' and turn a profitable trade into a loss. The issue of funding rates is not the only challenge associated with perps. During the October 10 crash last year, exchanges socialized losses to protect their systems, resulting in the liquidation of both losing and profitable positions. While this event was not unique to perps, it highlighted the importance of understanding the risks associated with these contracts. Krenn argued that the problem was not with perps themselves but rather with the crypto exchange margin model. 'It is not a perpetual problem; it is a crypto exchange margin model problem,' he said. 'Dated futures on those same venues sit behind the same insurance funds and the same deleveraging queue.' In conclusion, perps have democratized futures trading by addressing issues of access, cost, and margin efficiency. However, they also come with unique pain points, particularly the volatile funding-rate exposure that cannot be quantified or hedged. 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.