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

Discussing crypto trading with experienced traders often leads to conversations about perpetual futures, or 'perps', which are derivative contracts allowing for larger positions with less capital. Unlike standard futures, perps have no expiration date, making them a popular choice for traders. For altcoin traders, perps are often the only viable derivatives option due to illiquid dated futures and spot markets. Traders praise perps for their deep liquidity, low trading fees, and high margin efficiency, enabling them to manage risk effectively. However, funding rates, which are recurring costs for keeping positions open, pose a significant concern. These rates can add up over time and are difficult to quantify and hedge. Traders attribute the popularity of perps to their necessity, particularly for crypto-native firms, where they serve as a primary tool. Perps offer better fills, lower fees, and the ability to run both long and short positions simultaneously. The always-on nature of perps has also shifted price discovery to occur around the clock, rather than just during market hours. Despite their advantages, perps are not without unique challenges, including volatile funding-rate exposure. Traders warn that this exposure can be a significant burden, especially for long-term positions. The lack of a liquid dated curve in crypto means the market is carrying an interest rate exposure that cannot be priced or hedged, making funding a 'tax' for access to this leveraged market.