The Dual Nature of Perpetual Futures: Benefits and Drawbacks According to Crypto Traders

Engaging in discussions about crypto trading with experienced traders often leads to conversations about perpetual futures, or 'perps' - a type of derivatives contract that enables traders to control larger positions with less capital. Unlike standard futures, perps do not have an expiration date, making them a unique and attractive option for traders. For altcoin traders, perps are often the only viable derivatives market available, as dated futures for these assets are typically illiquid. CoinDesk spoke with traders who have found success 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 the deep liquidity, low trading fees, and high margin efficiency of perps as major advantages. However, they also expressed concerns about funding rates, which are recurring costs for maintaining open positions. Funding rates can be thought of as interest charges that accumulate over time, and traders are worried about the potential impact on their profitability. So, why do perps attract such high trading volumes, with daily averages exceeding $200 billion? According to Lucas Krenn, a derivatives trader at market-making firm STS Digital, perps are not just one tool among many, but rather the primary instrument for crypto-native firms. Krenn explained that dated futures are often illiquid, making them less desirable for traders. Perps, on the other hand, offer better fills, lower fees, and the ability to run both long and short positions simultaneously. Kenneth Ong, an independent trader, shared a similar perspective, highlighting the benefits of perps for retail traders, including improved order execution and reduced costs. Both Krenn and Ong emphasized the importance of margin efficiency in perps, which allows traders to manage risk more effectively across different venues and tokens. The perpetual nature of perps has also shifted the dynamics of price discovery, enabling traders to react to news and events in real-time, rather than being limited to traditional market hours. This has significant implications for the way traders approach the market, as they can now respond quickly to changing conditions. However, perps are not without their challenges, and traders must be aware of the potential risks, including funding rates and liquidations. The funding rate, in particular, can be a significant concern, as it can fluctuate over time and is typically charged every eight hours. This can result in unexpected costs for traders, especially if they hold positions for extended periods. Krenn and Ong both expressed concerns about the funding rate, with Krenn noting that it can be 'unquantifiable at the point of trade and unhedgeable afterwards.' Ong was more blunt, stating that the funding rate 'can potentially balloon to the point where a profitable trade loses money.' Despite these challenges, perps remain a popular choice among traders, offering a unique combination of liquidity, efficiency, and flexibility. As the crypto market continues to evolve, it is likely that perps will play an increasingly important role, providing traders with new opportunities for growth and innovation. Nevertheless, traders must remain vigilant, carefully managing their risk exposure and staying informed about market developments to navigate the complexities of perps trading.