The Double-Edged Sword of Perpetual Futures in Crypto Trading

Discussing crypto trading with seasoned traders often leads to conversations about perpetual futures, or 'perps' - a type of derivatives contract allowing traders to control large positions with minimal capital. Unlike standard futures, perps have no expiration date, making them an attractive option for traders. For altcoin traders, perps are often the only viable avenue for derivatives trading, as dated futures contracts for these assets are typically illiquid. CoinDesk spoke with traders who have thrived in the perpetual futures market to understand what sets perps apart from other derivatives and how they cater to the needs of both institutional and retail traders. The traders' responses were overwhelmingly positive, citing perps' deep liquidity, low trading fees, and efficient margin usage. However, they also expressed concerns about the funding rates associated with perps, which can add up over time. Lucas Krenn, a derivatives trader at STS Digital, noted that perps are the primary tool for crypto-native firms, as dated futures contracts often lack liquidity. Kenneth Ong, an independent trader, highlighted the benefits of perps for retail traders, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Both traders emphasized the importance of margin efficiency in perps, which allows traders to manage risk across multiple venues and tokens with minimal capital. The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than only during market hours. Ong recalled an instance during the Iran conflict, where tokenized oil trading on Hyperliquid saw a significant surge in volume over a weekend, resulting in a chunk of the repricing occurring before the official market opened. Krenn noted that perps have become a powerful tool for trading various assets, sidestepping the need for traditional infrastructure. However, both traders cautioned about the funding rate, which can be a significant burden for traders holding positions for extended periods. The funding rate, typically charged every eight hours, can be difficult to quantify and hedge, making it a considerable risk for traders. As the crypto market continues to evolve, perps are likely to play an increasingly important role, but traders must be aware of the unique challenges associated with these contracts, including the volatile funding-rate exposure.