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

When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' often comes up. These derivatives contracts enable traders to control larger positions with less capital. Unlike standard futures, perps have no expiry date, making them a popular choice among traders. For altcoin traders, perps are often the only viable option for derivatives trading, as dated futures for these tokens are typically illiquid. Spot markets are also not a primary concern for traders who don't plan to hold onto their assets long-term. To better understand the appeal of perps, we spoke with traders who have found success in the perpetual futures market. They highlighted the deep liquidity, low trading fees, and high margin efficiency of perps as key advantages. However, they also expressed concerns about funding rates, which can add up over time and impact trading profitability. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the 'plumbing underneath everything' his firm does. Outside of bitcoin and ether, dated futures liquidity is limited, making perps the go-to tool for crypto-native firms. Krenn noted that dated futures aren't popular due to the costs associated with replacing them at expiry, which can lead to inefficiencies in futures-based ETFs. Kenneth Ong, an independent trader, shared a similar perspective, highlighting the benefits of perps for retail traders, including better fills, lower fees, and the ability to run both long and short positions simultaneously via hedge mode. Ong started trading in the spot market but shifted to perps due to their advantages. Both Ong and Krenn emphasized that margin efficiency is a significant draw for perps, allowing traders to manage risk efficiently across different venues and tokens. Because perps require only a fraction of a position's value as collateral, traders can split their capital across multiple venues and still maintain meaningful positions. The always-on nature of perps has also shifted price discovery to occur around the clock, rather than just during market hours. Ong recalled an instance during the Iran conflict, where tokenized oil trading on Hyperliquid saw a surge in volume over a weekend, with the 'official' market closed. By Monday, a significant portion of the repricing had already occurred in the crypto and tokenized commodity perps market. Krenn sees the same mechanism playing out in perps tied to traditional assets, such as tokenized equities. Building a proper tokenized equity product is challenging, but perps that reference the price can sidestep these issues, making them appealing for traders. Both traders believe that the 'perpification' of various assets will gain momentum in the coming years, with Ong noting that tokenized oil trading is a preview of what's to come for other commodities. However, they also warned about the risks associated with perps, particularly the funding rate. A dated futures contract provides a clear interest rate, whereas a perpetual futures contract has a funding rate that changes over time, typically charged every eight hours. This exposes traders to a floating rate while holding a position, with no built-in mechanism to lock it in. If the market doesn't move as expected, the funding rate can become a significant burden. Krenn described it as 'unquantifiable at the point of trade and unhedgeable afterwards.' Ong was more blunt, stating that the funding rate 'can potentially balloon to the point where a profitable trade loses money.' The traders also discussed the myth of the safe trade, citing an instance where bitcoin's bear market triggered widespread deleveraging across both losing and profitable positions. Exchanges socialized losses to protect their systems, resulting in the force-closure of both long and short positions. Krenn argued that the problem wasn't with perps but rather with the crypto exchange margin model. He emphasized that the distinction between perpetual and dated futures is not the key issue; instead, it's whether traders are facing a proper clearing house with a mutualized default fund or an exchange that socializes losses onto winners. Krenn offered an insightful perspective on perp risk, suggesting that being long is the structurally safer side. His logic is that positive funding is easy to arbitrage away, whereas negative funding is more challenging to address due to the constraints on shorting the underlying token. This asymmetry is often overlooked in risk models, leading to a bounded cost and unbounded upside for long positions, while short positions have a bounded upside and unbounded cost. In conclusion, perps have democratized futures trading by solving issues of access, cost, and margin efficiency. However, they are not without unique pain points, such as the volatile funding-rate exposure that can't be quantified or hedged. 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.' For now, funding is the tax everyone pays for easy access to this leveraged market.