The Double-Edged Sword of Perpetual Futures in Crypto Trading

When discussing crypto trading with experienced traders, perpetual futures, or 'perps', are often the first topic that comes up. These derivatives contracts enable 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 altcoin traders, perps are often the only viable option for derivatives trading, as dated futures contracts for these assets are typically illiquid. CoinDesk spoke with traders who have thrived in the perps market to understand what sets them apart from other derivatives and how they cater to the needs of both institutional and retail traders. The traders unanimously praised perps for their deep liquidity, low trading fees, and efficient margin usage, which allows for greater trading exposure with less collateral. However, they also expressed concerns over funding rates, a recurring cost associated with keeping positions open. Funding rates can be thought of as an interest charge that accrues over time, and traders are worried about the potential impact on their profits. According to Lucas Krenn, a derivatives trader at STS Digital, perps are the primary tool for crypto-native firms, as they offer better liquidity and more efficient trading than dated futures. Kenneth Ong, an independent trader, echoed this sentiment, highlighting the advantages of perps for retail traders, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Both traders emphasized the importance of margin efficiency in perps, which enables traders to manage risk across multiple venues and tokens with a single pool of capital. The perpetual nature of perps has also shifted price discovery to a 24/7 process, allowing traders to react to news and events in real-time. However, this also means that traders are exposed to funding rates, which can be volatile and difficult to predict. Krenn and Ong both expressed concerns over the funding rate, citing its potential to erode profits and create unforeseen risks. The funding rate is typically charged every eight hours and can be a significant burden for traders who hold positions for extended periods. The traders also discussed the myth of the 'safe trade', highlighting the risks associated with perps, particularly during times of high market volatility. They emphasized that the problem lies not with perps themselves, but with the margin models used by crypto exchanges. Krenn noted that the key distinction is not between perpetual and dated futures, but between exchanges with proper clearing houses and mutualized default funds, and those that socialize losses onto winners. The traders also touched on the asymmetry of perp risk, with Krenn arguing that being long is structurally safer due to the ease of arbitraging away positive funding rates. However, when funding rates are negative, the arbitrage process is more complex, and the gap between perp and spot prices can persist, leading to prolonged periods of negative funding rates. In conclusion, while perps have democratized futures trading by providing access, low costs, and efficient margin usage, they also come with unique challenges, particularly the volatile funding-rate exposure that cannot 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.'