The Double-Edged Sword of Perpetual Futures: Insights from Crypto Traders

When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic that comes up. These derivatives contracts allow traders to control large positions with minimal capital, offering a key advantage over standard futures: they have no expiration date. For traders of alternative cryptocurrencies, perps are frequently the only viable option for derivatives trading, as dated futures for these assets are often illiquid, and the spot market is typically only used for long-term holdings. CoinDesk spoke with traders who have thrived in the perpetual futures market to explore what sets perps apart from other derivatives, how they cater to the needs of both institutional and retail traders, and the actual costs associated with perps trading. The traders' responses were clear and largely unanimous: everyone appreciates perps due to their deep liquidity, low trading fees, and efficient margin usage, which enables traders to maximize their exposure with minimal collateral. However, trading fees are not the only expense traders face. There is also a recurring cost for maintaining open positions, known as funding rates, which can accumulate over time and are a concern for the traders interviewed. So, why do perps dominate the crypto derivatives market, with daily volumes exceeding $200 billion? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the backbone of the firm's operations, particularly for assets other than bitcoin and ether, where dated futures liquidity is scarce. Krenn notes that perps are not just one tool among many but are, in fact, the primary tool for crypto-native firms. Kenneth Ong, an independent trader with extensive experience in perps, shares a similar perspective, highlighting the benefits of perps for retail traders, including better execution prices, lower fees, and the ability to hold both long and short positions simultaneously. Ong emphasizes that margin efficiency is the main draw of perps, allowing traders to manage risk effectively across multiple venues and assets. The perpetual nature of perps has also shifted price discovery to a 24/7 process, with traders reacting to news and events as they happen, rather than only during traditional market hours. Both Krenn and Ong see the 'perpification' of various assets gaining momentum, with tokenized oil trading being a prime example. However, they also caution about the funding rate, which can be a significant burden for traders, particularly those holding positions for extended periods. The funding rate, which is typically charged every eight hours, can be unpredictable and may become a substantial expense if the market does not move as expected. Krenn and Ong agree that the funding rate is a more pressing concern than liquidations, which are often cited as a major risk associated with perps. The lack of a built-in mechanism to lock in the funding rate and the inability to hedge against it make it a unique challenge for traders. In conclusion, while perps have democratized futures trading by addressing issues of access, cost, and margin efficiency, they also introduce distinct pain points, such as volatile funding-rate exposure. As Krenn puts 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.' For now, funding rates are the 'tax' everyone pays for easy access to this leveraged market.