The Double-Edged Sword of Perpetual Futures in Crypto Trading

Discussing crypto trading with experienced traders often leads to conversations about perpetual futures, or 'perps' - a type of derivative contract that allows 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. However, they also come with unique challenges, particularly with regards to funding rates. To better understand the appeal and risks of perps, CoinDesk spoke with traders who have thrived in the perpetual futures market. Their responses highlighted the key benefits of perps, including deep liquidity, low trading fees, and efficient margin usage. One trader, Lucas Krenn, noted that perps are the 'plumbing underneath everything' his firm does, as they offer a necessary tool for navigating the crypto market. Another trader, Kenneth Ong, explained that perps provide better fills, lower fees, and the ability to run both long and short positions simultaneously. Despite these advantages, traders also expressed concerns about funding rates, which can add up over time and negatively impact profitability. The funding rate is essentially an interest charge that accrues as long as a position is held, and it can be difficult to quantify and hedge. Krenn and Ong both emphasized the importance of understanding funding rates and their potential impact on trades. In addition to funding rates, perps have also been criticized for their role in market volatility and liquidations. However, Krenn argued that the issue lies not with perps themselves, but with the crypto exchange margin model. He noted that dated futures on the same venues face similar problems, and that the key distinction is between facing a proper clearing house with a mutualized default fund or an exchange that socializes losses onto winners. Overall, perps have democratized futures trading by providing access to leveraged markets, but they also introduce unique pain points, such as volatile funding-rate exposure. As Krenn put 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.'