The Dual Nature of Perpetual Futures: Benefits and Drawbacks in Crypto Trading

When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic that comes up. These contracts allow traders to control large positions with minimal capital, functioning similarly to standard futures but without an expiration date. For traders of alternative cryptocurrencies, perps may be the only viable option for derivatives trading due to the illiquidity of dated futures and the spot market. Traders who have thrived in the perps market explain that these contracts offer deep liquidity, low trading fees, and efficient margin usage, making them an attractive choice for both institutional and retail traders. However, traders also express concerns about the funding rates associated with perps, which can add up over time and impact profitability. The popularity of perps is attributed to their necessity, as dated futures often lack liquidity and incur significant costs when replacing contracts at expiry. Perps provide better fills, lower fees, and the ability to hold both long and short positions simultaneously, giving them an edge over traditional futures. The perpetual nature of these contracts has also shifted price discovery to occur around the clock, rather than only during market hours. Despite their advantages, perps come with unique challenges, such as the funding rate, which can be volatile and difficult to quantify. Traders warn that this funding rate can become a significant burden if not properly managed, potentially turning a profitable trade into a loss. The lack of a liquid dated curve in crypto means that the market is exposed to an interest rate that cannot be accurately priced or hedged, making funding a 'tax' that everyone pays for access to this leveraged market.