When discussing crypto trading with experienced traders, the conversation often revolves around perpetual futures, also known as perps. These derivatives contracts enable traders to control large positions with minimal capital. Unlike standard futures, perps do not have an expiration date, making them a popular choice among traders. For altcoin traders, perps are often the only viable option for derivatives trading, as dated futures for these assets are typically illiquid.
In a conversation with CoinDesk, traders who have successfully navigated the perpetual futures market shared their insights on what makes perps unique, how they cater to the needs of both institutional and retail traders, and the associated costs. The consensus among traders is that perps offer deep liquidity, low trading fees, and high margin efficiency, making them an attractive option. However, traders also expressed concerns about funding rates, which can add up over time and impact profitability. To understand the appeal of perps, it's essential to consider the daily volume, which exceeds $200 billion.
According to Lucas Krenn, a derivatives trader at STS Digital, perps are the foundation of the firm's operations, particularly for assets other than bitcoin and ether, where dated futures liquidity is limited. Krenn emphasized that perps are not just one tool among many, but rather the primary instrument for crypto-native firms.
The lack of liquidity in dated futures can lead to significant price swings, making it challenging for traders to execute orders at stable prices. In contrast, perps provide better fills, lower fees, and the ability to hold both long and short positions simultaneously.
Kenneth Ong, an independent trader, shared a similar perspective, highlighting the advantages of perps for retail traders, including improved execution, lower costs, and increased flexibility. Ong noted that the ability to run both long and short positions via hedge mode is a significant advantage over traditional futures markets. Both Krenn and Ong stressed that margin efficiency is a crucial factor in the appeal of perps, as they allow traders to manage risk efficiently across multiple venues and assets.
The perpetual nature of perps has also shifted price discovery, enabling traders to react to news and events in real-time, rather than being limited to traditional market hours. The always-on nature of perps has led to the development of new trading strategies, such as tokenized oil trading, which has seen significant growth. However, traders also cautioned about the risks associated with perps, particularly the funding rate, which can be volatile and unpredictable. Krenn and Ong expressed concerns about the impact of funding rates on profitability, especially for traders who hold positions for extended periods.
The funding rate, which is typically charged every eight hours, can become a significant burden if the market does not move as expected. In addition to funding rates, traders also discussed the risks associated with liquidations, which can result in significant losses if not managed properly.
The October 10 crash last year highlighted the potential risks of perps, as exchanges socialized losses to protect their systems, leading to widespread deleveraging. Krenn argued that the issue was not with perps themselves, but rather with the crypto exchange margin model, which can lead to a lack of transparency and unpredictability. In conclusion, perps have democratized futures trading by providing access to a leveraged market with low costs and high margin efficiency. However, they also come with unique challenges, such as volatile funding-rate exposure, which can be difficult to quantify and hedge.
As the crypto market continues to evolve, it's essential for traders to understand the pros and cons of perps and develop strategies to mitigate the associated risks.