The Double-Edged Sword of Perpetual Futures: Benefits and Drawbacks According to Crypto Traders

When discussing crypto trading with experienced traders, the conversation often revolves around perpetual futures, or 'perps' - a type of derivatives contract that allows traders to control large positions with minimal capital. Perps function similarly to standard futures but without an expiry date, making them a preferred choice for traders. For altcoin traders, perps are often the only viable option for derivatives trading due to the illiquidity of dated futures and the spot market. 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 agreed that perps are attractive due to their deep liquidity, low trading fees, and high margin efficiency. However, they also expressed concerns about the funding rates, which can add up over time and impact trading profitability. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the backbone of their trading operations, particularly for altcoins, where dated futures liquidity is scarce. Krenn noted that the costs associated with replacing dated futures contracts at expiry make them less efficient than perps. Kenneth Ong, an independent trader, shared a similar perspective, highlighting the benefits of perps for retail traders, including better fills, lower fees, and the ability to run both long and short positions simultaneously. Ong emphasized that margin efficiency is a significant draw for perps, allowing traders to manage risk across multiple venues and tokens with minimal capital. The perpetual nature of perps has also shifted price discovery to a 24/7 process, with traders reacting to news and events outside traditional market hours. Both Krenn and Ong see the 'perpification' of various assets gaining momentum, with tokenized oil trading being a prime example. However, they also cautioned about the funding rate, which can be a significant burden for traders, particularly if they hold positions for extended periods. The funding rate, which is typically charged every eight hours, can be unpredictable and may lead to losses even if the trade is profitable. Krenn stressed that the funding rate is a concern because it is unquantifiable at the point of trade and cannot be hedged afterwards. Ong warned that the funding rate can 'balloon' over time, turning a profitable trade into a loss. The traders also addressed the criticism surrounding perps during the October 10 crash, which triggered widespread deleveraging and liquidations. Krenn argued that the issue was not with perps themselves but with the crypto exchange margin model, which socializes losses onto winners. He emphasized that the key distinction is not between perpetual and dated futures but between facing a proper clearing house with a mutualized default fund or an exchange that socializes losses. Krenn also offered an insight into the asymmetry of perp risk, suggesting that being long is structurally safer due to the ease of arbitraging away positive funding. However, when the funding rate is negative, the arbitrage process is more complex, and the gap between perp and spot prices can persist. In conclusion, perps have democratized futures trading by addressing issues of access, cost, and margin efficiency, but they also come with unique challenges, such as volatile funding-rate exposure. 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.' For now, funding remains the 'tax' everyone pays for easy access to this leveraged market.