The Double-Edged Nature of Perpetual Futures in Crypto Trading

When discussing crypto trading, savvy traders often bring up perpetual futures, or 'perps', which are derivatives contracts allowing for larger positions with less capital. Unlike standard futures, perps have no expiry date. For altcoin traders, perps are often the only viable derivatives option due to illiquid dated futures and spot markets. CoinDesk spoke with traders who thrive in the perps market, and they highlighted the advantages of deep liquidity, low trading fees, and efficient margin use. However, they also expressed concerns over funding rates, which are recurring costs for keeping positions open. Traders view perps as a necessary tool, given the lack of liquidity in dated futures. Perps offer better fills, lower fees, and the ability to hold both long and short positions simultaneously. The perpetual nature of perps allows for price discovery to occur at any time, not just during market hours. Despite the benefits, traders are wary of the funding rate, which can become a significant burden if not managed properly. The funding rate is unquantifiable at the point of trade and cannot be hedged once the position is open. Experienced traders warn that the funding rate can potentially turn a profitable trade into a loss if held for an extended period. The recent bitcoin bear market highlighted the risks of perps, with widespread deleveraging and liquidations. However, traders argue that the issue lies not with perps themselves, but with the crypto exchange margin model. The key distinction is between facing a proper clearing house with a mutualized default fund or an exchange that socializes losses onto winners. One trader noted that being long is often the structurally safer side, as positive funding can be easily arbitraged away. In contrast, negative funding rates can persist due to constrained arbitrage, making the short side riskier. The asymmetry between long and short sides is often not accurately priced in risk models. As the crypto market continues to evolve, perps are likely to play a significant role, but traders must be aware of the unique challenges and risks associated with these derivatives.