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 enable traders to control larger positions with less capital, offering a key advantage over standard futures: they don't expire. 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 mainly used for long-term holdings. CoinDesk spoke with traders who have thrived in the perpetual futures market to understand what sets perps apart, how they cater to the needs of institutional and retail traders, and the associated costs. The traders' responses were clear and almost unanimous: perps are favored due to their deep liquidity, low trading fees, and high margin efficiency. However, trading fees are not the only expense; there's also the funding rate, a recurring cost for maintaining open positions, which traders are concerned about. The funding rate can be thought of as an interest charge that accrues over time, and traders are worried about how much it could add up. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the foundation of the firm's operations, providing the necessary liquidity and efficiency. Krenn explained that outside of bitcoin and ether, dated futures lack sufficient liquidity, making perps the go-to tool for crypto-native firms. Kenneth Ong, an independent trader, shared a similar perspective, highlighting the benefits of perps for retail traders, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Ong noted that perps offer a significant advantage over regulated venues like the CME, where a single account is typically netted by default. Both Ong and Krenn emphasized that margin efficiency is the primary draw to perps, allowing traders to manage risk efficiently across different venues and tokens. Because perps require only a fraction of a position's value as collateral, traders can split their capital across multiple venues and still maintain meaningful positions. The always-on nature of perps has shifted price discovery to occur whenever news breaks, rather than only during market hours. Ong recalled an instance during the Iran conflict, where tokenized oil trading on Hyperliquid saw a significant surge in volume, and the price reaction occurred on crypto/tokenized commodity perps while the 'official' market was closed. Krenn sees the same mechanism playing out in perps tied to other traditional assets, such as tokenized equities, which can sidestep the complexities of traditional share ownership on-chain. Both traders believe that the 'perpification' of various assets will gain momentum in the coming years, with Ong noting that tokenized oil trading is a preview of what's to come for other commodities. However, they also warned about the funding rate, which can be a significant burden for traders, especially if the market doesn't move as expected. The funding rate is unquantifiable at the point of trade and unhedgeable afterwards, making it a concern for traders. Krenn and Ong also addressed the issue of liquidations, which are often cited as a problem with perps, but they argued that the issue lies with the crypto exchange margin model, rather than with perps themselves. Krenn offered an insight that inverts the common assumption about perp risk, stating that being long is the structurally safer side, as positive funding is easy to arbitrage away. However, when the funding rate is negative, the arbitrage is more difficult, and the gap between perp and spot prices can persist, leading to extremely negative funding rates. In conclusion, perps have democratized futures trading by solving the problem of access, cost, and margin efficiency, but they are not without unique challenges, such as the volatile funding-rate exposure that can't be quantified or hedged.