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 do not have an expiry date, making them a popular choice among traders. For altcoin traders, perps are often the only viable option for derivatives trading, as dated futures for these coins are typically illiquid. CoinDesk spoke with traders who have thrived in the perps market to understand what sets them apart from other derivatives and how they cater to the needs of both institutional and retail traders. The traders praised perps for their deep liquidity, low fees, and high margin efficiency, which enables them to manage risk effectively. However, they also expressed concerns over funding rates, which can add up over time and negatively impact trading profits. Funding rates are essentially interest charges that accrue the longer a position is held, and traders are worried about their potential impact on their bottom line. To understand the appeal of perps, it's essential to consider the limitations of dated futures. These contracts need to be replaced at expiry, which can be costly. In contrast, perps offer a more efficient and cost-effective way to trade. Lucas Krenn, a derivatives trader at STS Digital, and independent trader Kenneth Ong, highlighted the benefits of perps, including better fills, lower fees, and the ability to run both long and short positions simultaneously. The traders also discussed the importance of margin efficiency, which allows them to manage risk across different venues and tokens. One of the significant advantages of perps is their ability to facilitate price discovery. Since perps are always on, price discovery can occur at any time, not just during market hours. This has led to a shift in how traders approach the market, with many now focusing on perps as a primary trading vehicle. However, perps also come with unique challenges, such as funding rate exposure. This can be difficult to quantify and hedge, making it a concern for traders. The traders emphasized that the funding rate is not just a minor fee but can potentially balloon into a significant expense, especially for long-term positions. To mitigate this risk, traders need to carefully consider their trading strategies and risk management techniques. In conclusion, perps have democratized futures trading by providing a cost-effective and efficient way to access the market. While they offer many benefits, including deep liquidity and high margin efficiency, they also come with unique challenges, such as funding rate exposure. As the crypto market continues to evolve, it's essential for traders to understand the pros and cons of perps and develop effective strategies to manage their risk.