When discussing crypto trading, experienced traders often bring up perpetual futures, or 'perps,' which are derivatives contracts allowing for larger positions with less capital. These contracts function similarly to standard futures but lack an expiry date. For many altcoins, perps are the primary means of derivatives trading due to the illiquidity of dated futures and the spot market.
Traders appreciate perps for their liquidity, low fees, and efficient margin use, which enables greater trading exposure with less collateral. However, a significant concern is the funding rate, a recurring cost for maintaining open positions, akin to an interest charge that accrues over time. This rate can be unpredictable and may add substantial expenses for traders.
The perpetual nature of perps has also shifted price discovery to a continuous process, unaffected by traditional market hours. Despite their benefits, perps come with unique challenges, such as liquidations and the volatile funding rate exposure, which cannot be easily quantified or hedged. As the crypto market continues to evolve, understanding the intricacies of perps is crucial for both retail and institutional traders to navigate the landscape effectively.