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

When discussing crypto trading with experienced traders, perpetual futures, also known as 'perps,' are a prominent topic. These derivatives contracts enable traders to control larger positions with less capital. Unlike standard futures, perps do not have an expiration date, making them a unique instrument in the crypto market. For traders of alternative cryptocurrencies, perps are often the only viable option for derivatives trading due to the illiquidity of dated futures and the spot market. Traders who have excelled in the perpetual futures market attribute their success to the deep liquidity, low trading fees, and high margin efficiency of perps. However, they also express concerns about the funding rates, which are recurring costs associated with keeping positions open. The funding rate is essentially an interest charge that accrues over time, and traders are worried about its potential to add up significantly. The popularity of perps can be attributed to their necessity in the crypto market. According to Lucas Krenn, a derivatives trader, perps are the primary tool for crypto-native firms due to the lack of liquidity in dated futures outside of bitcoin and ether. Kenneth Ong, an independent trader, highlights 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 emphasize the importance of margin efficiency in perps, which allows for efficient risk management across different venues and tokens. The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than just during market hours. This has led to increased trading activity in perps tied to traditional assets, such as tokenized oil. However, traders are cautious about the funding rate, which can be a significant burden if not managed properly. The funding rate is typically charged every eight hours and can be a challenge to quantify and hedge. As the crypto market continues to evolve, the use of perps is likely to gain momentum, with traders expecting increased liquidity and trading activity in various asset classes. Nevertheless, the funding rate remains a concern, and traders must be aware of its potential impact on their trades. In conclusion, perps have democratized futures trading by providing access, cost efficiency, and margin efficiency, but they also come with unique challenges, particularly the volatile funding-rate exposure that cannot be quantified or hedged.