The Pros and Cons of Perpetual Futures in Crypto Trading

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. Unlike standard futures, perps do not have an expiry date, making them a unique and 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. CoinDesk spoke with traders who have thrived in the perps market to understand what makes them different and how they benefit both institutional and retail traders. The traders emphasized the advantages of perps, including deep liquidity, low trading fees, and high margin efficiency, which enables them to manage risk effectively. However, they also expressed concerns about funding rates, which can add up over time and impact trading costs. One trader, Lucas Krenn, noted that perps are not just one tool among many, but rather the primary tool for crypto-native firms. He explained that dated futures are often illiquid, making it difficult to execute large trades without significantly impacting prices. Another trader, Kenneth Ong, shared his experience as a retail trader, highlighting the benefits of perps, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Both traders agreed that margin efficiency is a key advantage of perps, allowing them to manage risk effectively across different venues and tokens. The always-on nature of perps has also changed the way price discovery occurs, with traders reacting to news and events outside of traditional market hours. However, the traders also warned about the risks associated with perps, particularly the funding rate, which can be volatile and difficult to quantify. They noted that funding rates can become a significant burden for traders, especially those holding positions for extended periods. Krenn emphasized that the funding rate is a major concern, as it can be unquantifiable and unhedgeable, making it a unique pain point for perps traders. Despite these risks, the traders believe that perps will continue to gain momentum in the coming years, with more assets being tokenized and traded on these platforms. As the market evolves, it is essential for traders to understand the benefits and drawbacks of perps and to develop strategies to manage the associated risks.