The Double-Edged Sword of Perpetual Futures: Benefits and Drawbacks in Crypto Trading

Discussing crypto trading with experienced traders often leads to the topic of perpetual futures, or 'perps' - a type of derivatives contract that enables traders to control large positions with minimal capital. Unlike standard futures, perps do not have an expiration date, making them a popular choice among traders. For many altcoins, perps are the primary avenue for derivatives trading, as dated futures are often illiquid and the spot market is not a viable option for short-term trading. Traders who have thrived in the perps market attribute their success to the deep liquidity, low trading fees, and efficient margin management that perps offer. However, they also express concerns over funding rates, which can add up over time and eat into profits. The funding rate is a recurring cost associated with keeping positions open, and it can be a significant expense for traders. According to Lucas Krenn, a derivatives trader at STS Digital, perps are the 'plumbing underneath everything' the firm does, and are a necessity for crypto-native firms. Kenneth Ong, an independent trader, agrees, stating that perps offer better fills, lower fees, and the ability to run both long and short positions simultaneously. Both traders emphasize the importance of margin efficiency in perps, which allows traders to manage risk efficiently across different venues and tokens. The always-on nature of perps has also shifted price discovery to occur around the clock, rather than just during market hours. However, the funding rate remains a major concern, as it can be volatile and unpredictable. Krenn notes that the funding rate is 'unquantifiable at the point of trade and unhedgeable afterwards,' making it a significant risk for traders. Ong adds that the funding rate can 'potentially balloon to the point where a profitable trade loses money.' Despite these risks, perps are likely to continue to play a major role in crypto trading, as they offer a unique combination of liquidity, efficiency, and flexibility. As Krenn puts 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.'