The Double-Edged Sword of Perpetual Futures: Insights from Crypto Traders

When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' often comes up. These derivatives contracts enable traders to control large positions with minimal capital. Unlike standard futures, perps do not have an expiry date, making them a popular choice among traders. For altcoin traders, perps are often the only viable option for derivatives trading, as dated futures are typically illiquid and spot markets are not ideal for short-term trading. Traders praise perps for their deep liquidity, low trading fees, and efficient margin usage, which allows for greater trading exposure with less collateral. However, they also express concerns over funding rates, which are recurring costs for maintaining open positions. Funding rates can add up over time and are a significant expense for traders. The high daily volume of perps, exceeding $200 billion, is attributed to their necessity in the crypto market. Lucas Krenn, a derivatives trader, notes that perps are the primary tool for crypto-native firms, as dated futures lack liquidity outside of bitcoin and ether. Kenneth Ong, an independent trader, highlights the advantages 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 efficient risk management across different venues and tokens. The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than only during market hours. This has led to increased trading activity in tokenized commodities, such as oil, during non-traditional hours. While perps offer many benefits, traders are cautious about the funding rate, which can be a significant burden if not managed properly. The funding rate is typically charged every eight hours and can be volatile, making it challenging for traders to quantify and hedge. The lack of a built-in mechanism to lock in the funding rate exposes traders to floating rates, which can lead to unexpected losses. As the crypto market continues to evolve, perps are likely to play a significant role in shaping the future of trading. However, traders must be aware of the unique challenges associated with perps, including funding rate exposure and margin efficiency. By understanding these factors, traders can navigate the complexities of perps and make informed decisions about their trading strategies.