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 they have become a crucial tool for both retail and institutional traders. However, while perps offer many advantages, including low trading fees and high margin efficiency, they also come with unique challenges, particularly with regards to funding rates. To understand the benefits and drawbacks of perps, we spoke with traders who have thrived in the perpetual futures market. They explained how perps differ from other derivatives, how they help traders manage risk, and what costs are associated with trading them. One of the primary advantages of perps is their deep liquidity, which allows traders to enter and exit positions quickly and at stable prices. Additionally, perps offer low trading fees and high margin efficiency, making them an attractive option for traders who want to maximize their exposure while minimizing their capital outlay. However, traders also highlighted the importance of funding rates, which can add up quickly and eat into profits. Funding rates are essentially interest charges that traders pay for holding positions open, and they can be volatile and difficult to predict. According to Lucas Krenn, a derivatives trader at market-making firm STS Digital, perps are not just one tool among many, but rather the primary tool for crypto-native firms. 'Outside of bitcoin and ether, dated futures liquidity is thin to the point of being unusable,' he said. 'So perps are not one tool among several. For a crypto-native firm, they are the tool.' Kenneth Ong, an independent trader, echoed Krenn's sentiments, noting that perps offer better fills, lower fees, and the ability to run both long and short positions simultaneously. However, both traders also emphasized the importance of managing funding rates, which can be a significant challenge. 'It's not just some tiny fee you can ignore,' Ong said. 'If you hold positions for long periods, it can potentially balloon to the point where a profitable trade loses money.' The always-on nature of perps has also shifted price discovery to occur whenever news breaks, rather than just during traditional market hours. This has created new opportunities for traders, but also new challenges. For instance, during the Iran conflict, tokenized oil trading on Hyperliquid saw a significant surge in volume, with much of the price action occurring outside of traditional market hours. As the use of perps continues to grow, traders will need to adapt to these new market dynamics and find ways to manage their funding rate exposure. According to Krenn, the key to success in perps is to understand the asymmetry between long and short positions. 'Being long is the structurally safer side,' he said. 'Positive funding is easy to arbitrage away, but negative funding is much harder to compress.' This asymmetry can create unique challenges for traders, particularly those who are shorting assets with low liquidity or concentrated ownership. As the crypto market continues to evolve, it's likely that perps will play an increasingly important role in shaping price discovery and trading dynamics. However, traders will need to be aware of the potential pitfalls, particularly with regards to funding rates, and develop strategies to manage their exposure and maximize their returns.