The Dual Nature of Perpetual Futures: Benefits and Drawbacks According to Crypto Traders

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 larger positions with less capital, functioning similarly to standard futures but without an expiration date. For traders of alternative cryptocurrencies, perps may be the only viable option for derivatives trading, as dated futures for these assets are often illiquid and the spot market is typically used for long-term holdings. 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 associated costs of perps trading. The traders' responses were overwhelmingly positive, citing perps' deep liquidity, low trading fees, and efficient margin usage, which allows for greater trading exposure with less collateral. However, they also expressed concerns about funding rates, a recurring cost for maintaining open positions that can add up over time. 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 the lack of liquidity in dated futures outside of bitcoin and ether. Kenneth Ong, an independent trader, echoed this sentiment, highlighting perps' benefits 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 occur around the clock, rather than only during market hours. This has led to increased trading activity in tokenized commodities, such as oil, which can react to news events in real-time. While perps offer many advantages, traders are wary of the funding rate, which can be unpredictable and costly. Unlike dated futures contracts, which have a fixed interest rate, perps have a funding rate that changes over time and is typically charged every eight hours. This exposes traders to a floating rate that cannot be locked in, making it difficult to quantify and hedge against. 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.' The traders also discussed the myth of the 'safe trade,' which was debunked during the October 10 crash last year. Despite the challenges, perps are likely to continue gaining popularity, with both traders predicting increased adoption in the coming years. As Krenn said, '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 remain a significant consideration for traders, serving as a 'tax' for accessing the leveraged market.