When discussing cryptocurrency trading, savvy traders often bring up perpetual futures, or 'perps,' which are derivative contracts allowing for larger positions with less capital. Unlike standard futures, perps have no expiration date, making them appealing for traders of alternative coins where dated futures are often illiquid.
CoinDesk spoke with traders who thrive in the perpetual futures market to understand what sets perps apart, how they cater to both institutional and retail traders, and the associated costs. The consensus among traders is that perps are favored for their deep liquidity, cheap trading fees, and efficient margin usage. However, traders also express concern over funding rates, which are recurring costs for keeping positions open and can add up over time.
The reason perps see such high daily volumes, exceeding $200 billion, is largely out of necessity rather than choice, according to Lucas Krenn, a derivatives trader. For crypto-native firms, perps are not just one tool among many but the primary tool due to the lack of liquidity in dated futures outside of bitcoin and ether. Kenneth Ong, an independent trader, highlights the benefits of perps from a retail perspective, including better order execution, lower fees, and the ability to hold both long and short positions simultaneously. Both traders emphasize that margin efficiency is a significant draw to perps, allowing for the management of risk across different venues and tokens with less capital.
The perpetual nature of perps has also shifted price discovery, allowing it to occur at any time, not just when traditional markets are open. This was evident during the Iran conflict, where tokenized oil trading saw significant activity over a weekend, leading to price adjustments before traditional markets opened. Traders see the 'perpification' of various assets as a trend that will continue, offering a preview of what's to come for commodities and equities.
However, they also caution about the funding rate, which can be a significant burden, especially for long-term positions. Unlike dated futures contracts, which have a fixed interest rate, perpetual futures contracts have funding rates that change over time and are typically charged every eight hours, leaving traders exposed to floating rates without a mechanism to lock them in. This concern is compounded by the fact that funding rates can be volatile and difficult to predict, making them a challenge to hedge. The issue of funding rates is not just a minor fee but can potentially turn a profitable trade into a loss if positions are held for extended periods.
The recent bear market in bitcoin, which started with a crash on October 10, highlighted the risks associated with perpetual futures, including the socialization of losses by exchanges to protect their systems. This led to the liquidation of both losing and profitable positions, criticizing perpetual futures.
However, Krenn argues that the problem lies not with perps themselves but with the crypto exchange margin model and the lack of a proper clearing house with a mutualized default fund. He also points out an asymmetry in perp risk that few people correctly price, suggesting that being long is structurally safer due to the ease of arbitraging away positive funding. In contrast, negative funding rates can persist due to constrained arbitrage, leading to an asymmetry where the long side has bounded costs and unbounded upside, while the short side has bounded upside and unbounded costs. This asymmetry is rarely accounted for in risk models.
The example of Euler's token, which saw a deeply negative funding rate due to a small and concentrated float, illustrates this point. In conclusion, while perps have democratized futures trading by addressing issues of access, cost, and margin efficiency, they come with unique challenges, particularly the volatile funding-rate exposure that cannot be quantified or hedged. Until a liquid dated curve exists in crypto, the market will carry an interest rate exposure it cannot price or hedge, making funding a 'tax' for accessing this leveraged market.