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 come with unique challenges. To better understand the advantages and disadvantages of perps, we spoke with traders who have thrived in this market.
They highlighted the deep liquidity, low trading fees, and efficient margin usage as key benefits, but also expressed concerns over the funding rates, 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 primary tool for crypto-native firms, as dated futures lack liquidity outside of bitcoin and ether. Kenneth Ong, an independent trader, echoed this sentiment, citing better fills, lower fees, and the ability to run both long and short positions simultaneously as advantages of perps.
However, both traders noted that the funding rate is a significant concern, as it can be volatile and difficult to quantify. This rate, which is typically charged every eight hours, can become a burden if the market doesn't move as expected. The traders also discussed the importance of margin efficiency, which allows them to manage risk across different venues and tokens.
The always-on nature of perps has also shifted price discovery, allowing traders to react to news and events outside of traditional market hours. While perps offer many benefits, they also come with unique challenges, such as the funding rate exposure, which can be difficult to hedge.
As Krenn noted, 'Until there is a liquid dated curve in crypto, the whole market is carrying an interest rate exposure it cannot price and cannot hedge.' Despite these challenges, perps are likely to continue growing in popularity, as they offer a unique combination of liquidity, low fees, and flexibility.