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, and their popularity stems from the absence of expiry dates. For traders of alternative cryptocurrencies, perps are frequently the only viable option for derivatives trading, as dated futures contracts for these assets are often illiquid. In contrast, spot markets are generally only considered by traders who plan to hold their positions long-term. To better understand the allure of perps, we spoke with traders who have thrived in this market. Their responses highlighted the deep liquidity, low trading fees, and efficient margin usage as key benefits. However, they also emphasized the significance of funding rates, which can add substantial costs to traders' positions. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the foundation of their trading activities, particularly for cryptocurrencies beyond Bitcoin and Ether. Krenn noted that dated futures contracts for these assets are often too illiquid to be useful, making perps the go-to choice. Kenneth Ong, an independent trader, shared a similar perspective, citing the advantages of perps for retail traders, including better execution prices, lower fees, and the ability to hold both long and short positions simultaneously. Ong also emphasized the importance of margin efficiency, which allows traders to manage risk across multiple venues and tokens with greater ease. The perpetual nature of perps has also changed the dynamics of price discovery, allowing traders to react to news and events in real-time, rather than being limited to traditional market hours. This has led to a shift in trading activity, with perps becoming an essential tool for traders seeking to capitalize on market movements. Despite their popularity, perps are not without risks. Traders are concerned about the funding rates, which can be volatile and difficult to predict. Krenn and Ong both highlighted the potential for funding rates to become a significant burden, particularly for traders who hold positions for extended periods. The funding rate is a recurring cost that can add up over time, and traders need to carefully consider this expense when using perps. In conclusion, perps have democratized futures trading by providing a cost-effective and efficient way to access derivatives markets. However, traders must be aware of the unique challenges associated with perps, including the unpredictable funding rates. As the crypto market continues to evolve, it is essential for traders to understand the intricacies of perps and develop strategies to mitigate their risks.