The Double-Edged Sword of Perpetual Futures: Benefits and Drawbacks

Discussing crypto trading with seasoned traders often leads to a conversation about perpetual futures, or 'perps', which are derivative contracts allowing traders to control larger positions with less capital. Unlike standard futures, perps do not have an 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. Spot markets are also less favorable for traders who do not plan to hold their positions long-term. Traders who have thrived in the perpetual futures market cite the deep liquidity, low trading fees, and efficient margin usage as the primary advantages of perps. However, they also express concern over the funding rates, which are recurring costs associated with keeping positions open. These rates can add up over time and negatively impact a trade's profitability. The popularity of perps can be attributed to their ability to provide traders with the necessary tools to manage risk efficiently. According to Lucas Krenn, a derivatives trader at STS Digital, perps are the foundation of his firm's operations, particularly for assets outside of bitcoin and ether, where dated futures liquidity is scarce. Kenneth Ong, an independent trader, also highlights the benefits of perps, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. The perpetual nature of perps allows for price discovery to occur at any time, rather than being limited to traditional market hours. This has led to a shift in how traders approach the market, with many favoring perps over dated futures. Nevertheless, the funding rate remains a significant concern, as it can be unpredictable and may lead to substantial losses if not managed properly. As the crypto market continues to evolve, it is likely that perps will play an increasingly important role in shaping the landscape of derivatives trading. Despite the unique challenges associated with perps, traders believe that their benefits outweigh the drawbacks, making them an essential tool for both retail and institutional traders.