The Double-Edged Sword of Perpetual Futures: Benefits and Risks in Crypto Trading

When discussing crypto trading with seasoned traders, the conversation often revolves around perpetual futures, or 'perps.' These derivatives contracts enable traders to control large positions with minimal capital. Perps function similarly to standard futures but lack an expiry date, making them a unique and attractive option for traders. For altcoin traders, perps are often the only viable avenue for derivatives trading due to the illiquidity of dated futures and the spot market. To understand what makes perps distinct from other derivatives and how they cater to the needs of institutional and retail traders, we spoke with experienced traders who have thrived in the perpetual futures market. Their responses highlighted the benefits of perps, including deep liquidity, low trading fees, and efficient margin usage. However, they also expressed concerns about the funding rates associated with perps, which can add up over time. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the foundation of their trading activities, particularly for crypto-native firms. Krenn explained that outside of bitcoin and ether, dated futures lack liquidity, making perps the primary tool for traders. Kenneth Ong, an independent trader, shared a similar perspective, noting that perps offer 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 minimal capital. The perpetual nature of perps has also shifted price discovery, enabling traders to react to news and events in real-time, rather than waiting for traditional market hours. While perps have democratized access to futures trading, they also come with unique challenges, such as volatile funding-rate exposure. Traders Krenn and Ong warned that funding rates can become a significant burden, especially for long-term positions. The funding rate, which is typically charged every eight hours, can be difficult to quantify and hedge, making it a concern for traders. In conclusion, perps have revolutionized the crypto trading landscape by providing a liquid and cost-effective way to trade futures. However, traders must be aware of the potential risks, including funding-rate exposure, to navigate the market successfully.