The Double-Edged Sword of Perpetual Futures in Crypto Trading

When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' often comes up. These derivatives contracts allow traders to control large positions with minimal capital, offering an advantage over traditional futures due to their lack of expiry. For altcoin traders, perps are often the only viable option for derivatives trading, as dated futures are frequently illiquid and the spot market is less relevant for short-term traders. CoinDesk spoke with traders who have found success in the perpetual futures market to understand what sets perps apart from other derivatives, how they cater to both institutional and retail traders, and the associated costs. The traders' responses highlighted the deep liquidity, low trading fees, and efficient margin usage of perps, but also expressed concern over funding rates, which are recurring costs for maintaining open positions. According to Lucas Krenn, a derivatives trader at STS Digital, perps are the primary tool for crypto-native firms due to the illiquidity of dated futures outside of bitcoin and ether. Kenneth Ong, an independent trader, noted that perps offer better fills, lower fees, and the ability to hold both long and short positions simultaneously via hedge mode, making them more attractive than traditional futures. Both traders emphasized the importance of margin efficiency in perps, which allows for greater trading exposure with less capital. However, they also warned about the risks associated with funding rates, which can be unpredictable and costly. The traders believe that the 'perpification' of various assets will continue to gain momentum, but also cautioned about the potential drawbacks of perps, including liquidations and funding rate exposure. In their view, the key distinction is not between perpetual and dated futures, but between exchanges with proper clearing houses and mutualized default funds, and those that socialize losses onto winners. Ultimately, perps have democratized futures trading, but their unique characteristics require traders to carefully consider the associated risks and costs.