The Double-Edged Sword of Perpetual Futures in Crypto Trading

When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' inevitably comes up. These derivatives contracts allow traders to control large positions with minimal capital, offering a significant advantage over traditional futures contracts, which have expiry dates. Perps have become a crucial tool for both retail and institutional traders, providing access to a wide range of assets, including altcoins, with better liquidity and lower fees. However, traders are also wary of the funding rates associated with perps, which can add up over time and impact the profitability of trades. According to Lucas Krenn, a derivatives trader at STS Digital, perps are the 'plumbing underneath everything' the firm does, offering a necessary tool for navigating the crypto market. Kenneth Ong, an independent trader, agrees, highlighting the benefits of perps, including better fills, lower fees, and the ability to run both long and short positions simultaneously. Despite these advantages, traders are concerned about the funding rates, which can be volatile and difficult to quantify. Krenn notes that the funding rate is a major cause for concern, as it can change over time and is typically charged every eight hours, leaving traders exposed to a floating rate. Ong warns that the funding rate can 'potentially balloon to the point where a profitable trade loses money.' The perpetual nature of perps has also shifted price discovery, allowing traders to react to news and events in real-time, rather than being limited to traditional market hours. While perps offer many benefits, they also present unique challenges, including the risk of liquidations and the impact of funding rates on trade profitability. As Krenn puts 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.'