The Dual Nature of Perpetual Futures: Benefits and Drawbacks According to Crypto Traders

When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' often comes up. These derivatives contracts allow traders to control larger positions with less capital. Unlike standard futures, perps do not have an expiry date. For traders of alternative cryptocurrencies, perps are often the only viable option for derivatives trading due to the illiquidity of dated futures and the spot market. Traders appreciate perps for their deep liquidity, low trading fees, and efficient margin usage. However, they also express concern about the funding rates, which are recurring costs for maintaining open positions. Funding rates can be seen as interest charges that accumulate over time. Traders argue that perps are not a matter of choice, but rather a necessity, especially for crypto-native firms. The liquidity of perps allows for better trade execution and lower fees compared to standard dated futures. Retail traders also prefer perps for their ability to hold both long and short positions simultaneously. The perpetual nature of perps enables price discovery to occur at any time, not just during market hours. Nevertheless, traders are wary of the funding rates, which can be unpredictable and burdensome. They note that while liquidations are a risk, the funding rate is a more significant concern. The funding rate can change over time and is typically charged every eight hours, leaving traders exposed to floating rates without a mechanism to lock them in. Traders warn that if the market does not move as expected, the funding rate can become a substantial burden, potentially turning a profitable trade into a loss. The recent bear market has highlighted the risks associated with perps, particularly the socialization of losses by exchanges. However, traders argue that this is not a problem with perps themselves, but rather with the crypto exchange margin model. They emphasize the importance of proper clearing houses with mutualized default funds. One trader points out that being long is structurally safer due to the ease of arbitraging away positive funding rates. In contrast, negative funding rates can persist due to constrained arbitrage, leading to an asymmetry that few risk models account for. This asymmetry can result in funding rates remaining extremely high or low for extended periods. Ultimately, perps have democratized futures trading by addressing issues of access, cost, and margin efficiency, but they also introduce unique challenges, such as volatile funding-rate exposure. As one trader puts it, the entire market is carrying an interest rate exposure that cannot be priced or hedged until a liquid dated curve emerges in crypto.