The Pros and Cons of Perpetual Futures in Crypto Trading

When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' often comes up. These derivatives contracts allow traders to control larger positions with less capital, but they also come with unique challenges. To better understand the role of perps in crypto trading, CoinDesk spoke with traders who have thrived in this market. They explained how perps differ from other derivatives, how they meet the needs of institutional and retail traders, and the costs associated with trading them. The traders unanimously praised perps for their deep liquidity, low trading fees, and efficient margin usage. However, they also expressed concerns about the funding rates, which can add up over time and impact trading costs. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the primary tool for crypto-native firms due to their liquidity and efficiency. Kenneth Ong, an independent trader, echoed this sentiment, highlighting 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 for greater trading exposure with less capital. They also discussed the impact of perps on price discovery, particularly in times of market volatility. The always-on nature of perps enables price discovery to occur around the clock, rather than just during traditional market hours. While perps offer many advantages, they also come with unique challenges, such as funding rates and liquidations. The funding rate, in particular, can be a significant concern, as it can change over time and is typically charged every eight hours. This can make it difficult for traders to quantify and hedge their exposure. As Krenn noted, 'It is unquantifiable at the point of trade and unhedgeable afterwards.' Ong also expressed concern about the funding rate, stating that it can 'potentially balloon to the point where a profitable trade loses money.' Despite these challenges, perps are likely to continue playing a significant role in crypto trading. 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.' In the meantime, funding rates will remain a key consideration for traders in this market.