The Dual Nature of Perpetual Futures in Crypto Trading

When discussing crypto trading with experienced traders, the conversation often turns to perpetual futures, or 'perps' - a type of derivatives contract that enables traders to control larger positions with less capital. Unlike standard futures, perps do not have an expiry date, making them an attractive option for traders. For altcoin traders, perps are often the only viable avenue for derivatives trading, as dated futures for these coins are typically illiquid, and the spot market is not a viable option for those who do not plan to hold onto their assets long-term. CoinDesk spoke with traders who have thrived in the perpetual futures market to understand what sets perps apart from other derivatives, how they cater to the needs of both institutional and retail traders, and the costs associated with perps trading. 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 highlighted the funding rate as a significant concern, as it can add up over time and impact the profitability of a trade. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the foundation of the firm's operations, as they offer a more liquid and efficient way to trade than dated futures. Kenneth Ong, an independent trader, echoed this sentiment, citing the benefits of perps for retail traders, including better fills, lower fees, and the ability to run both long and short positions simultaneously. Both traders emphasized the importance of margin efficiency in perps, which allows traders to manage risk more effectively across different venues and tokens. Perps have also changed the way price discovery occurs, as they allow for trading to happen around the clock, rather than only during traditional market hours. This has led to a shift in how news and events impact markets, with perps often reacting to news before traditional markets. Despite the benefits of perps, traders are wary of the funding rate, which can be volatile and difficult to predict. Krenn and Ong both expressed concern 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 fluctuate over time, making it challenging for traders to anticipate and manage. In addition to the funding rate, perps have faced criticism for their role in exacerbating market volatility, particularly during times of stress. However, Krenn argues that the issue lies not with perps themselves, but with the exchange margin models and insurance funds that underpin them. He suggests that the key distinction is not between perpetual and dated futures, but between exchanges that use a proper clearing house with a mutualized default fund and those that socialize losses onto winners. Krenn also offered an insightful perspective on the asymmetry of perp risk, suggesting that being long is structurally safer due to the ability to arbitrage away positive funding. In contrast, negative funding rates can persist for extended periods, creating an unbounded cost for short positions. This asymmetry is often overlooked in risk models, and it has significant implications for traders. As the crypto market continues to evolve, perps are likely to play an increasingly important role in shaping the landscape of futures trading. While they offer many benefits, including democratized access and efficient margin usage, they also present unique challenges, such as volatile funding-rate exposure. As Krenn noted, until a liquid dated curve emerges in crypto, the market will continue to carry an interest rate exposure that cannot be priced or hedged, making funding a tax that everyone pays for access to this leveraged market.