The Dual Nature of Perpetual Futures: Benefits and Drawbacks

When discussing crypto trading, savvy traders often bring up perpetual futures, or 'perps', which are derivative contracts allowing for larger positions with less capital. These contracts function similarly to standard futures but without an expiry date. For traders of alternative coins, perps are often the only viable derivatives option due to illiquid dated futures and a spot market that is primarily used for long-term holdings. Traders who have found success in the perpetual futures market attribute their success to the deep liquidity, low trading fees, and efficient margin use of perps. However, they also express concern over the funding rates, which are recurring costs for maintaining open positions. The funding rate is essentially an interest charge that accrues over time and can add up significantly. Traders note that perps have become a necessity due to the lack of liquidity in dated futures, particularly for coins other than bitcoin and ether. Lucas Krenn, a derivatives trader, explains that perps are the primary tool for crypto-native firms, as dated futures are too costly and illiquid. Kenneth Ong, an independent trader, highlights the benefits of perps for retail traders, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Both traders emphasize the importance of margin efficiency in perps, which allows for greater trading exposure with less capital. However, they also warn about the risks associated with funding rates, which can be unpredictable and difficult to hedge. The traders note that the funding rate can be a significant burden, especially for long-term positions, and that it is essential to carefully consider this cost when trading perps. In conclusion, while perps have democratized futures trading by providing access, low costs, and efficient margin use, they also come with unique challenges, such as volatile funding-rate exposure that cannot be quantified or hedged.