Understanding the Pros and Cons of Perpetual Futures in Crypto Trading

When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' often comes up. These derivatives contracts allow traders to control large positions with minimal capital. Unlike standard futures, perps have no expiry date, making them a popular choice among traders. For altcoin traders, perps are often the only viable option for derivatives trading due to the illiquidity of dated futures and spot markets. To understand what makes perps unique and how they benefit both institutional and retail traders, we spoke with experienced traders who have thrived in the perps market. They highlighted the deep liquidity, low trading fees, and efficient margin usage as key advantages. However, they also expressed concerns over funding rates, which are recurring costs associated with keeping positions open. Funding rates can add up over time and are a significant expense for traders. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the primary tool for crypto-native firms due to the lack of liquidity in dated futures. Kenneth Ong, an independent trader, echoes this sentiment, citing better fills, lower fees, and the ability to run both long and short positions simultaneously as advantages of perps. Both traders agree that margin efficiency is a significant draw, as perps require only a fraction of the position's value as collateral, allowing for more efficient risk management. The perpetual nature of perps has also shifted price discovery, enabling traders to react to news and events in real-time, rather than waiting for markets to open. While perps offer many benefits, they also come with unique challenges, such as funding rate exposure, which can be difficult to quantify and hedge. As the crypto market continues to evolve, it's essential for traders to understand the pros and cons of perps and how to navigate these challenges to succeed in the market.