The Dual Nature of Perpetual Futures: Benefits and Drawbacks in Crypto Trading

When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' often comes up. These derivatives contracts allow traders to control large positions with minimal capital. Unlike standard futures, perps do not have an expiry date, making them a unique tool in the crypto market. For traders of alternative coins, perps may be the only viable option for derivatives trading due to the illiquidity of dated futures and the spot market. CoinDesk spoke with traders who have found success in the perps market to understand what sets them apart from other derivatives and how they cater to the needs of both institutional and retail traders. The traders unanimously praised perps for their deep liquidity, low trading fees, and efficient margin usage, which enables significant trading exposure with minimal collateral. However, they also highlighted the concern of funding rates, a recurring cost associated with keeping positions open. Funding rates can be thought of as an interest charge that accrues over time, and traders are worried about the potential impact on their profits. The popularity of perps can be attributed to their necessity in the crypto market. Lucas Krenn, a derivatives trader, noted that outside of bitcoin and ether, dated futures lack liquidity, making perps the primary tool for crypto-native firms. Kenneth Ong, an independent trader, shared a similar perspective, emphasizing the benefits of perps for retail traders, including better execution prices, lower fees, and the ability to hold both long and short positions simultaneously. Both traders agreed that margin efficiency is a significant advantage of perps, allowing for the management of risk across different venues and tokens with minimal capital. The perpetual nature of perps has also shifted the dynamics of price discovery, enabling it to occur at any time, not just during market hours. This was evident during the Iran conflict, where tokenized oil trading on Hyperliquid saw a surge in volume over a weekend, with the majority of the price adjustment happening before the official market opened. Traders believe that the 'perpification' of various assets will continue to gain momentum, with tokenized oil trading being a precursor to what's to come for other commodities and equities. However, they also cautioned about the funding rate, which can be a significant burden for traders, especially if the market doesn't move as expected. The funding rate is unquantifiable at the point of trade and cannot be hedged once the position is open. This concern is compounded by the fact that funding rates can fluctuate over time and are typically charged every eight hours. The traders warned that ignoring funding rates can lead to significant losses, even on profitable trades. The issue of funding rates is further complicated by the lack of a liquid dated curve in crypto, leaving the market exposed to interest rate risks that cannot be priced or hedged. In conclusion, while perps have democratized futures trading by addressing issues of access, cost, and margin efficiency, they also introduce unique challenges, particularly the volatile funding-rate exposure. As the crypto market continues to evolve, it is essential for traders to understand the intricacies of perps and their associated risks to navigate the market effectively.