The Double-Edged Sword of Perpetual Futures: Insights from Crypto Traders

When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic that comes up. These derivatives contracts allow traders to control larger positions with less capital, and unlike standard futures, they don't have an expiration date. For traders of alternative cryptocurrencies, perps are frequently the only viable option for derivatives trading, as dated futures for these assets are often illiquid, and the spot market is not a priority for those who don't plan to hold onto their assets long-term. CoinDesk spoke with traders who have found success in the perpetual futures market to understand what sets perps apart from other derivatives, how they meet the needs of both institutional and retail traders, and the costs associated with perps trading. The traders' responses were consistent: they appreciate perps for their deep liquidity, low trading fees, and efficient margin usage, which enables them to achieve greater trading exposure with less collateral. However, they also highlighted the funding rate as a significant concern. The funding rate is a recurring cost for maintaining open positions, akin to an interest charge that accrues over time. Lucas Krenn, a derivatives trader at market-making firm STS Digital, and Kenneth Ong, an independent trader, both emphasized the importance of perps in the crypto market. Krenn noted that outside of bitcoin and ether, dated futures lack liquidity, making perps the primary tool for crypto-native firms. Ong, who mostly trades perps, pointed out that they offer better fills, lower fees, and the ability to hold both long and short positions simultaneously via hedge mode. This flexibility is a significant advantage over regulated venues like the CME, where accounts are typically netted by default. Both traders stressed that margin efficiency is a major draw to perps, as they require only a fraction of a position's value as collateral, allowing traders to split their capital across multiple venues and tokens. The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than only during market hours. Ong recalled the Iran conflict, where tokenized oil trading on Hyperliquid saw a surge in volume over a weekend, and by Monday, a significant portion of the repricing had already occurred. Krenn believes that perps will continue to gain traction in various asset classes, as they provide a powerful tool for traders. However, both traders warned about the funding rate, which can be a significant burden for traders who hold positions for extended periods. The funding rate is unquantifiable at the time of trade and cannot be hedged once the position is open. Ong emphasized that the funding rate is not a minor fee that can be ignored, as it can potentially turn a profitable trade into a loss. The traders also addressed the criticism that perps faced during the October 10 crash, which triggered widespread deleveraging across the market. Krenn argued that the issue was not with perps themselves but rather with the crypto exchange margin model. He noted that dated futures on the same venues face the same problems, and the key distinction is whether the exchange has a proper clearing house with a mutualized default fund. Krenn also offered an insight that challenges the common assumption about perp risk, stating that being long is the structurally safer side. His logic is that positive funding is easy to arbitrage away, but when the funding rate is negative, the arbitrage is more difficult, and the gap between perp and spot prices can persist. This asymmetry is often not accounted for in risk models, and Krenn cited the example of lending protocol Euler's token, where funding on the perp went deeply negative, and shorts were paying a significant amount to longs. In conclusion, perps have democratized futures trading by providing access, low costs, and efficient margin usage, but they also come with unique challenges, particularly the volatile funding-rate exposure that cannot be quantified or hedged. As Krenn put it, the whole market is carrying an interest rate exposure that it cannot price or hedge, and funding is the tax everyone pays for easy access to this leveraged market.