The Double-Edged Sword of Perpetual Futures in Crypto Trading

The world of crypto trading has become increasingly dominated by perpetual futures, or 'perps', which are derivatives contracts that allow traders to control large positions with minimal capital. Unlike traditional futures, perps do not have an expiry date, making them a popular choice among traders. However, they also come with unique challenges, particularly with regards to funding rates. Funding rates are essentially interest charges that traders pay to keep their positions open, and they can add up quickly. According to Lucas Krenn, a derivatives trader at STS Digital, perps are the 'plumbing underneath everything' the firm does, particularly when it comes to trading outside of bitcoin and ether. Kenneth Ong, an independent trader, agrees, citing the better fills, lower fees, and ability to run both long and short positions simultaneously as major advantages of perps. However, both traders also express concerns over funding rates, which can be volatile and difficult to quantify. Krenn notes that funding rates can be a major burden for traders, particularly if they hold positions for extended periods. Ong is more blunt, stating that funding rates can 'potentially balloon to the point where a profitable trade loses money'. The issue of funding rates is further complicated by the fact that perps are often traded on exchanges with socialized losses, which can lead to forced closures of positions and significant losses for traders. Despite these challenges, perps remain a popular choice among traders, and their use is likely to continue growing in the coming years. As Krenn puts it, 'until there is a liquid dated curve in crypto, the whole market is carrying an interest rate exposure it cannot price and cannot hedge'.