The Pros and Cons of Perpetual Futures in Crypto Trading

When discussing crypto trading with experienced traders, perpetual futures, also known as 'perps,' are often the first topic that comes up. These derivatives contracts allow traders to control larger positions with less capital. Unlike standard futures, perps do not have an expiration date, making them a popular choice among traders. However, they also come with unique challenges, such as funding rates, which can add up over time. To better understand the world of perps, we spoke with traders who have thrived in this market. They explained that perps offer deep liquidity, low trading fees, and efficient margin usage, making them an attractive option for both institutional and retail traders. One of the primary reasons traders prefer perps is the lack of liquidity in dated futures, particularly for altcoins. According to Lucas Krenn, a derivatives trader at STS Digital, 'perps are not just one tool among several, but the tool' for crypto-native firms. Kenneth Ong, an independent trader, agrees, stating that perps provide better fills, lower fees, and the ability to run both long and short positions simultaneously. Both traders emphasize that margin efficiency is a significant advantage of perps, as they require only a fraction of the position's value as collateral. This allows traders to split their capital across multiple venues and tokens, managing risk more efficiently. The always-on nature of perps has also shifted price discovery, enabling traders to react to news and events in real-time, rather than waiting for traditional market hours. However, perps also come with unique pain points, such as funding rates, which can be volatile and difficult to quantify. Traders are exposed to these rates, which can change over time and are typically charged every eight hours. If the market does not move as expected, the funding rate can become a significant burden. As Krenn notes, 'it is unquantifiable at the point of trade and unhedgeable afterwards.' Ong adds that 'if you hold positions for long periods, it can potentially balloon to the point where a profitable trade loses money.' Despite these challenges, perps have democratized futures trading, providing access to a wider range of traders. However, as Krenn warns, 'until there is a liquid dated curve in crypto, the whole market is carrying an interest rate exposure it cannot price and cannot hedge.' In conclusion, perps offer a unique set of benefits and drawbacks, and traders must carefully consider these factors when navigating the world of perpetual futures.