The Double-Edged Sword of Perpetual Futures in Crypto Trading

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, but they also come with unique challenges. Perps work similarly to standard futures, but without an expiry date, making them a popular choice for traders. However, the lack of expiry dates also means that traders must contend with funding rates, which can add up over time and eat into profits. To better understand the role of perps in crypto trading, we spoke with traders who have thrived in this market. They explained that perps offer several advantages, including deep liquidity, low trading fees, and efficient margin usage. Nevertheless, funding rates remain a major concern, as they can be difficult to predict and may lead to significant losses if not managed properly. One trader, Lucas Krenn, noted that perps are not just one tool among many, but rather the primary instrument for crypto-native firms. Another trader, Kenneth Ong, highlighted the benefits of perps for retail traders, including better fills, lower fees, and the ability to run both long and short positions simultaneously. Both traders emphasized the importance of margin efficiency in perps, which allows traders to manage risk more effectively. However, they also warned about the dangers of funding rates, which can be volatile and difficult to hedge. In fact, Krenn argued that the funding rate is a more significant concern than liquidations, as it can be unquantifiable and unhedgeable. Ong shared a similar concern, stating that funding rates can potentially balloon to the point where a profitable trade becomes unprofitable. The traders also discussed the impact of perps on price discovery, noting that the always-on nature of these contracts allows for more efficient price discovery, even outside of traditional market hours. Furthermore, they highlighted the potential for perps to spread into new asset classes, such as tokenized oil and commodities. Despite the benefits of perps, the traders acknowledged that there are unique pain points associated with these contracts, particularly the volatile funding-rate exposure. As Krenn put it, 'Until there is a liquid dated curve in crypto, the whole market is carrying an interest rate exposure it cannot price and cannot hedge.' In conclusion, perps have democratized futures trading by providing access, cost savings, and margin efficiency, but they also come with unique challenges, particularly the funding-rate exposure that cannot be quantified or hedged.