The Double-Edged Sword of Perpetual Futures: Benefits and Risks for 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 large positions with minimal capital, offering a key advantage over traditional futures: they never expire. 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 spot markets are mostly used for long-term holdings. CoinDesk spoke with traders who have thrived in the perpetual futures market to understand what sets perps apart from other derivatives, how they cater to the needs of both institutional and retail traders, and the costs associated with perps trading. The traders' responses were overwhelmingly positive, citing perps' deep liquidity, low trading fees, and high margin efficiency. However, they also expressed concerns about funding rates, which are recurring costs for keeping positions open. Funding rates are essentially interest charges that accrue over time, and traders are worried about their potential impact on profitability. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at market-making firm STS Digital, perps are the backbone of his firm's operations, particularly for cryptocurrencies outside of bitcoin and ether, where dated futures liquidity is scarce. Krenn explained that perps are not just one tool among many, but rather the primary instrument for crypto-native firms. Kenneth Ong, an independent trader, shared a similar perspective, highlighting perps' advantages for retail traders, including better execution prices, lower fees, and the ability to hold both long and short positions simultaneously. Ong noted that perps offer a significant advantage over regulated venues like the CME, where a single account is typically netted by default. Both Krenn and Ong emphasized that margin efficiency is a major draw for perps, allowing traders to manage risk efficiently across different venues and tokens. Because perps require only a fraction of a position's value as collateral, traders can split their capital across multiple venues and still maintain meaningful positions. The perpetual nature of perps has also shifted price discovery to a 24/7 process, with traders reacting to news and events in real-time, rather than just during traditional market hours. Ong recalled an experience during the Iran conflict, where tokenized oil trading on Hyperliquid saw a significant surge in volume, with much of the price reaction occurring on crypto/tokenized commodity perps while traditional markets were closed. Krenn believes that perps will continue to gain traction in the coming years, with the 'perpification' of various assets gaining momentum. However, traders also warned about the risks associated with perps, particularly the funding rate, which can be a significant burden for traders who hold positions for extended periods. Krenn noted that the funding rate is unquantifiable at the point of trade and unhedgeable afterwards, making it a major concern for traders. Ong was more blunt, stating that the funding rate is not just a small fee, but can potentially balloon to the point where a profitable trade becomes unprofitable. The traders also discussed the myth of the 'safe trade,' highlighting the risks associated with perpetual futures, particularly during times of high market volatility. Krenn argued that the problem is not with perps themselves, but rather with the crypto exchange margin model, which can lead to socialized losses and forced closures of positions. The distinction that matters, according to Krenn, is not between perpetual and dated futures, but rather between facing a proper clearing house with a mutualized default fund or an exchange that socializes losses onto winners. Krenn also offered an insight that challenges the common assumption about perp risk, suggesting that being long is the structurally safer side, as positive funding is easy to arbitrage away. However, when the funding rate is negative, the arbitrage is more difficult, and the gap between perp and spot prices can persist, leading to extremely negative funding rates. In conclusion, perps have democratized futures trading by solving the problems of access, cost, and margin efficiency, but they are not without unique pain points, particularly the volatile funding-rate exposure that cannot be quantified or hedged. As Krenn put 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.'