The Double-Edged Sword of Perpetual Futures in Crypto Trading

Discussing crypto trading with experienced traders often leads to a conversation about perpetual futures, or 'perps,' which are derivatives contracts allowing traders to control larger positions with less capital. Unlike standard futures, perps have no expiration date, making them a unique and popular choice among traders. For altcoin traders, perps are often the only viable option for derivatives trading, as dated futures for these assets are typically illiquid, and the spot market is not a priority for those who don't plan to hold onto their assets long-term. 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 unanimously praised perps for their deep liquidity, low trading fees, and efficient margin usage, which enables traders to maximize their exposure while minimizing the required collateral. However, they also expressed concerns about the funding rates, which are recurring costs for maintaining open positions and can add up over time. Funding rates are essentially interest charges that accumulate the longer a position is held, and traders are worried about the impact of these rates on their overall profitability. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are not just one tool among many, but rather the primary instrument for crypto-native firms, as they offer the necessary liquidity and flexibility. Krenn explained that dated futures are often illiquid, making it difficult for traders to execute large orders without significantly affecting market prices. Kenneth Ong, an independent trader, shared a similar perspective, highlighting the benefits of perps for retail traders, including better order fills, lower fees, and the ability to hold both long and short positions simultaneously. Ong also emphasized the importance of margin efficiency, which allows traders to manage their risk more effectively across different venues and tokens. Perps have also changed the way price discovery occurs, as their always-on nature enables traders to react to news and events in real-time, rather than being limited to traditional market hours. This has led to a shift in the way traders approach the market, with many now focusing on perps as their primary means of trading. Despite the advantages of perps, traders are wary of the funding rates, which can be unpredictable and difficult to hedge. Krenn and Ong both expressed concerns about the impact of funding rates on their trading strategies, with Krenn noting that the funding rate can be a significant burden for traders who hold positions for extended periods. Ong was more blunt, stating that the funding rate can potentially turn a profitable trade into a loss. The traders also discussed the concept of 'perpification,' where perps are used to trade a wide range of assets, from commodities to equities. This trend is expected to continue, with Ong predicting that tokenized oil trading will become more prevalent and that perps will play a key role in this market. However, the traders also cautioned that the funding rate exposure associated with perps can be volatile and difficult to quantify, making it a unique pain point for traders. 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.' In conclusion, perps have democratized futures trading by providing access, cost efficiency, and margin efficiency, but they also come with unique challenges, particularly with regards to funding rate exposure. As the crypto market continues to evolve, it is essential for traders to understand the benefits and drawbacks of perps and to develop strategies that mitigate the risks associated with these instruments.