The Double-Edged Sword of Perpetual Futures in Crypto Trading

When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' inevitably comes up. These derivatives contracts allow traders to control large positions with minimal capital, offering a key advantage over traditional futures: no expiration dates. For traders of alternative cryptocurrencies, perps are often the only viable option for derivatives trading, as dated futures contracts for these assets are typically illiquid, and the spot market is less relevant for short-term trading strategies. CoinDesk spoke with traders who have thrived in the perpetual futures market to understand what sets perps apart, how they cater to both institutional and retail traders, and the associated costs. The traders unanimously praised perps for their deep liquidity, low trading fees, and efficient margin usage, which enables traders to maximize their exposure with minimal collateral. However, they also highlighted the funding rate as a significant concern, as it can substantially add to trading costs over time. The funding rate is essentially an interest charge that accrues as long as a position is held, and traders are worried about its impact on their profitability. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the backbone of his firm's operations, particularly for assets other than bitcoin and ether, where dated futures contracts are scarce. Kenneth Ong, an independent trader, echoed this sentiment, citing the benefits of perps for retail traders, including better trade execution, lower fees, and the ability to hedge positions simultaneously. Both traders emphasized the importance of margin efficiency in perps, which allows them to manage risk effectively across multiple venues and assets. The perpetual nature of perps has also shifted the dynamics of price discovery, enabling traders to react to news and events in real-time, rather than being limited to traditional market hours. While perps offer many advantages, they also come with unique challenges, such as the funding rate, which can be difficult to quantify and hedge. Traders are exposed to a floating funding rate, which can change every eight hours, making it challenging to predict and manage costs. This has led to concerns about the sustainability of perps, particularly for traders who hold positions for extended periods. Despite these challenges, traders believe that perps will continue to gain traction, particularly as they become more widely available for various assets. However, they also caution that the funding rate must be carefully managed to avoid significant losses. In conclusion, perpetual futures have democratized access to futures trading, offering deep liquidity, low fees, and efficient margin usage. Nevertheless, traders must be aware of the unique pain points associated with perps, particularly the volatile funding-rate exposure, to navigate this complex market effectively.