The Double-Edged Sword of Perpetual Futures: Benefits and Drawbacks According to Crypto Traders

When discussing crypto trading with experienced traders, the conversation often revolves around perpetual futures, or 'perps' - a type of derivatives contract that enables traders to control large positions with minimal capital. These contracts function similarly to standard futures but lack an expiry date. For traders of alternative cryptocurrencies, perps are frequently the only viable option for derivatives trading, as dated futures contracts for these assets are often illiquid, and the spot market is typically only considered for long-term holdings. 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 the needs of both institutional and retail traders, and the associated costs of perps trading. The traders' responses were consistent: they appreciate perps for their deep liquidity, low trading fees, and efficient margin usage, which allows for greater trading exposure with less collateral. However, they also expressed concerns about funding rates - recurring costs for maintaining open positions, akin to interest charges that accumulate over time. The appeal of perps can be attributed to their necessity, with traders citing the lack of liquidity in dated futures contracts outside of bitcoin and ether. Lucas Krenn, a derivatives trader, notes that perps are the primary tool for crypto-native firms due to the thin liquidity of dated futures. Kenneth Ong, an independent trader, highlights 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 emphasize the importance of margin efficiency in perps, which allows for the management of risk across different venues and tokens with greater leverage than standard futures. The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than only during market hours. This has led to instances where significant price movements occur outside of traditional trading hours, such as during the Iran conflict. Traders also caution about the funding rate, which can be a significant burden for traders who hold positions for extended periods. The funding rate is unpredictable and can't be hedged, making it a unique pain point for perps traders. Despite these concerns, perps are expected to continue gaining momentum, with traders predicting increased adoption across various asset classes. The key takeaway is that while perps have democratized access to futures trading by addressing issues of cost and margin efficiency, they also introduce unique challenges, particularly the volatile funding-rate exposure that cannot be quantified or hedged.