When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic of conversation. These derivatives contracts enable traders to control large positions with minimal capital.
Perps function similarly to standard futures but without an expiration date, making them an attractive option for traders. For altcoin traders, perps are frequently the only viable avenue for derivatives trading, as dated futures for these assets are often illiquid, and the spot market is not a practical choice for those who don't plan to hold onto their assets long-term.
Traders who have thrived in the perpetual futures market cite the deep liquidity, low trading fees, and efficient margin usage as key advantages. However, they also express concern over funding rates, which can add significant costs to trades. The recurring cost of keeping positions open, known as funding rates, is a major worry for traders. Funding rates can be thought of as interest charges that accumulate over time, and traders are concerned about the potential impact on their trades.
So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at market-making firm STS Digital, perps are the foundation of the firm's operations. 'Outside of bitcoin and ether, dated futures liquidity is thin to the point of being unusable,' Krenn said.
'So, perps are not just one tool among several; for a crypto-native firm, they are the primary tool.' Kenneth Ong, an independent trader with six years of experience, mostly in perps, shares a similar perspective. Ong highlights the benefits of perps, including better fills, lower fees, and the ability to run both long and short positions simultaneously via hedge mode.
The hedge mode allows traders to hold both bullish and bearish bets on the same token in the same account, which is not possible on regulated venues like the CME. Ong started in the spot market but shifted to perps after realizing the benefits. For him, spot trading is now primarily for long-term holdings. Both Ong and Krenn emphasize that margin efficiency is a significant draw to perps.
With perps, traders can manage risk efficiently across different venues and tokens, as they require only a fraction of the position's value as collateral. The always-on nature of perps has also shifted price discovery to occur whenever news breaks, rather than only during market hours. During the Iran conflict, Ong found himself in the midst of this, as tokenized oil trading on Hyperliquid saw a significant surge in volume over a weekend. Krenn sees the same mechanism playing out in perps tied to other traditional assets.
The traders believe that the 'perpification' of various assets will gain momentum in the coming years. However, they also warn about the funding rate, which can be a significant burden for traders. 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 the position, with no built-in mechanism to lock it in.
If the market doesn't move as expected, the funding rate can become a substantial burden. 'It is unquantifiable at the point of trade and unhedgeable afterwards,' Krenn said.
Ong expressed his concern more bluntly: 'That funding's not just some tiny fee you can ignore. It's not. If you hold positions for long periods, it can potentially balloon to the point where a profitable trade loses money.' The traders also discussed the myth of the safe trade, citing the example of the October 10 crash, which triggered widespread deleveraging across both losing and profitable positions. Krenn argued that the problem wasn't with perps but with the crypto exchange margin model.
'It is not a perpetual problem; it is a crypto exchange margin model problem,' Krenn said. 'Dated futures on those same venues sit behind the same insurance funds and the same deleveraging queue.' Krenn offered an insight that inverts what most people assume about perp risk: 'Being long is the structurally safer side.' His logic is that positive funding is easy to arbitrage away, but when the funding rate is negative, the arbitrage is more difficult, and the gap between perp and spot prices can persist. Funding rates can stay extremely negative for long stretches, making the long side have a bounded cost and an unbounded upside, while the short side has a bounded upside and an unbounded cost. This asymmetry is not accounted for in many risk models.
In conclusion, perps have democratized futures trading by solving the problem of access, cost, and margin efficiency, but they are not without unique challenges, particularly the volatile funding-rate exposure that can't be quantified while taking bets and can't be hedged once the trade is on.