When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic that comes up. These derivatives contracts allow traders to control large positions with minimal capital. Unlike standard futures, perps do not have an expiration date, making them a unique and attractive option for traders. For altcoin traders, perps are often the only viable derivatives market, as dated futures for these assets are typically illiquid.

CoinDesk spoke with traders who have thrived in the perps market to understand what sets them apart, how they cater to both institutional and retail traders, and the associated costs. The traders unanimously praised perps for their deep liquidity, low trading fees, and efficient margin usage. However, they also expressed concerns over funding rates, which are recurring costs for maintaining open positions.

Funding rates can be thought of as interest charges that accumulate over time, and traders are worried about their potential impact on profitability. So, why do perps dominate the crypto derivatives market?

Traders argue that it is not a matter of choice, but rather necessity. Lucas Krenn, a derivatives trader at STS Digital, noted that perps are the foundation of their trading strategy, particularly for assets outside of bitcoin and ether, where dated futures liquidity is scarce. Kenneth Ong, an independent trader, shared a similar perspective, highlighting the benefits of perps for retail traders, including better execution prices, lower fees, and the ability to hold 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 to a 24/7 process, with traders reacting to news and events as they happen, rather than waiting for traditional market hours.

While perps offer many advantages, they also come with unique challenges, such as funding rate exposure, which can be difficult to quantify and hedge. Traders are concerned that funding rates can become a significant burden, especially for long-term positions. The lack of a built-in mechanism to lock in funding rates means that traders remain exposed to changing market conditions, which can result in unexpected costs. Despite these concerns, traders believe that perps will continue to gain traction, with Ong predicting that tokenized oil trading will become increasingly popular.

Krenn noted that the perpification of various assets will likely gain momentum, making it easier for traders to access new markets. However, he also warned that the funding rate exposure associated with perps is a significant risk that traders must carefully consider. In conclusion, perps have revolutionized the crypto derivatives market by providing a unique combination of liquidity, low fees, and margin efficiency.

While they are not without their challenges, traders believe that perps will continue to play a vital role in the evolution of crypto trading.