The Dual Nature of Perpetual Futures: Benefits and Drawbacks According to Crypto Traders

Discussing crypto trading with experienced traders often leads to conversations about perpetual futures, or 'perps', which are derivative contracts allowing traders to control larger positions with less capital. Unlike standard futures, perps do not have an expiry date, making them a unique tool for traders. For altcoins, perps are often the primary avenue for derivatives trading due to the illiquidity of dated futures and the spot market. Traders praise perps for their deep liquidity, low trading fees, and high margin efficiency, which enables them to manage risk effectively. However, they also express concerns about funding rates, a recurring cost for keeping positions open, akin to an interest charge that accumulates over time. The perpetual nature of perps has shifted price discovery to a 24/7 process, reacting to news as it breaks, rather than being limited to traditional market hours. Traders like Lucas Krenn and Kenneth Ong highlight the benefits of perps, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Despite these advantages, funding rates pose a significant concern, as they can change over time and are typically charged every eight hours, leaving traders exposed to floating rates without a built-in mechanism to lock them in. This unpredictability can lead to funding rates becoming a substantial burden if the market does not move as expected. The lack of a liquid dated curve in crypto means the market carries an interest rate exposure that cannot be accurately priced or hedged, making funding a 'tax' for accessing this leveraged market.