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

When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic that comes up. These derivatives contracts enable traders to control large positions with minimal capital. Unlike standard futures, perps do not have an expiration date, making them a popular choice among traders. For altcoin traders, perps are often the only viable option for derivatives trading, as dated futures contracts for these assets are typically illiquid. The spot market is also not a viable option for short-term traders, as it is mainly used for long-term holdings. CoinDesk spoke with traders who have thrived in the perps market to understand what makes them unique and how they cater to the needs of both institutional and retail traders. The traders unanimously agreed that perps offer deep liquidity, low trading fees, and efficient margin usage, making them an attractive option. 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 become a significant burden for traders. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the 'plumbing underneath everything' the firm does. For crypto-native firms, perps are not just one tool among many, but the primary tool. Dated futures are not popular due to the costs associated with replacing them at expiration, which can be costly. Perps, on the other hand, offer better liquidity, allowing for larger buy and sell orders without significantly affecting prices. Kenneth Ong, an independent trader, echoed Krenn's sentiments, stating that perps offer better fills, lower fees, and the ability to run both long and short positions simultaneously. This is particularly advantageous for retail traders, as it allows them to hedge their positions more effectively. Both Ong and Krenn emphasized that margin efficiency is a significant draw for perps. With perps, traders can manage risk more efficiently across different venues and tokens, as they require only a fraction of the position's value as collateral. The always-on nature of perps has also shifted price discovery, allowing traders to react to news and events in real-time, rather than waiting for markets to open. However, perps are not without their drawbacks. The funding rate, which is typically charged every eight hours, can be a significant concern for traders. Unlike dated futures contracts, which have a fixed interest rate, perps have a floating funding rate that can change over time. This makes it challenging for traders to quantify and hedge their exposure. Ong warned that the funding rate can 'potentially balloon' and turn a profitable trade into a loss. Krenn also expressed concerns over the funding rate, stating that it is 'unquantifiable' and 'unhedgeable.' The traders also discussed the myth of the 'safe trade,' citing the example of the October 10 crash, which triggered widespread deleveraging across both losing and profitable positions. Krenn argued that the problem was not with perps, but with the crypto exchange margin model. He emphasized that the distinction between perpetual and dated futures is not as important as the distinction between facing a proper clearing house with a mutualized default fund or an exchange that socializes losses onto winners. Krenn also offered an insight into the asymmetry of perp risk, stating that being long is the structurally safer side. He explained that positive funding is easy to arbitrage away, but negative funding can persist, making the short side more risky. In conclusion, perps have democratized futures trading by providing access, cost, and margin efficiency, but they are not without unique pain points, particularly the volatile funding-rate exposure. 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.'