The Double-Edged Sword of Perpetual Futures: Understanding the Pros and Cons

When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps', inevitably comes up. These derivatives contracts allow traders to control larger positions with less capital, and they have become a staple in the crypto market. Unlike traditional futures contracts, perps do not have an expiration date, making them a popular choice among traders. However, they also come with unique challenges, particularly with regards to funding rates. To better understand the world of perps, CoinDesk spoke with traders who have thrived in this market, including Lucas Krenn, a derivatives trader at STS Digital, and Kenneth Ong, an independent trader. Both traders highlighted the advantages of perps, including their deep liquidity, low trading fees, and high margin efficiency. Nevertheless, they also expressed concerns about the funding rates, which can add up over time and eat into a trader's profits. The funding rate is essentially an interest charge that accrues over time, and it can be difficult to predict and manage. Krenn and Ong noted that the funding rate is a major concern for traders, as it can quickly add up and become a significant burden. Despite these challenges, perps have become an essential tool for many traders, particularly those who trade altcoins. The lack of liquidity in traditional futures markets for these assets makes perps the only viable option for many traders. The perpetual nature of perps also allows for more efficient price discovery, as traders can react to news and events in real-time, rather than waiting for traditional markets to open. However, this also means that traders are exposed to funding rates that can change rapidly, making it difficult to predict and manage their costs. To mitigate this risk, traders often use strategies such as hedging and arbitrage, but these methods are not always effective. The issue of funding rates is further complicated by the fact that they can be difficult to quantify and hedge. As Krenn noted, 'It is unquantifiable at the point of trade and unhedgeable afterwards.' This makes it challenging for traders to accurately assess their exposure to funding rates and manage their risk accordingly. Despite these challenges, perps are likely to continue playing a major role in the crypto market. Their ability to provide deep liquidity, low trading fees, and high margin efficiency makes them an attractive option for many traders. However, it is essential for traders to carefully consider the risks associated with funding rates and develop strategies to manage these risks effectively. As the crypto market continues to evolve, it is likely that we will see new innovations and solutions emerge to address the challenges posed by perps. For now, traders must remain vigilant and adaptable, using their skills and experience to navigate the complex world of perpetual futures.