Discussing crypto trading with experienced traders often leads to the topic of perpetual futures, or 'perps,' which are derivatives contracts allowing traders to control large positions with minimal capital. These contracts function similarly to standard futures but lack an expiry date.
For traders of alternative cryptocurrencies, 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 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 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 expressed concern over funding rates, a recurring cost for maintaining open positions, likening it to an interest charge that accumulates over time. The reason for the widespread adoption of perps, with daily volumes exceeding $200 billion, is attributed to necessity rather than choice.
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, highlighted the benefits of perps for retail traders, including better order execution, lower fees, and the ability to hold both long and short positions simultaneously. Both traders emphasized margin efficiency as a significant advantage of perps, allowing for the management of risk across multiple venues and tokens with minimal capital. The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than being limited to traditional market hours.
This has been observed during significant events, such as the Iran conflict, where tokenized oil trading on Hyperliquid experienced a surge in volume over a weekend, with much of the price adjustment occurring before traditional markets opened. Traders see this 'perpification' of assets gaining momentum, with tokenized oil trading serving as a preview of what's to come for other commodities. Despite the advantages, traders are cautious about the funding rate, which can become a significant burden if not managed properly.
A dated futures contract provides a fixed interest rate, whereas a perpetual futures contract has a funding rate that changes over time and is typically charged every eight hours. This exposes traders to a floating rate, making it challenging to quantify and hedge. The funding rate can potentially negate the profitability of a trade if not carefully considered. The issue of funding rates is further complicated by the lack of a liquid dated curve in crypto, leaving the market vulnerable to unquantifiable and unhedgeable interest rate exposure.
In conclusion, while perps have democratized futures trading by addressing issues of access, cost, and margin efficiency, they also introduce unique challenges, particularly regarding funding rate exposure.