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 enable traders to control large positions with minimal capital. While perps share similarities with standard futures, they have a key advantage: no expiration date. For traders of alternative cryptocurrencies, perps are often the only viable option for derivatives trading, as dated futures contracts for these assets are typically illiquid. CoinDesk spoke with traders who have thrived in the perpetual futures market to understand what sets perps apart from other derivatives, how they cater to the needs of institutional and retail traders, and the associated costs. The traders unanimously praised perps for their deep liquidity, low trading fees, and efficient margin usage. However, they also expressed concerns about the funding rates, which can add up over time. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the foundation of their trading activities. 'Outside of bitcoin and ether, dated futures liquidity is thin to the point of being unusable,' he explained. 'Perps are not just one tool among many; for a crypto-native firm, they are the primary tool.' Kenneth Ong, an independent trader, shared a similar perspective, highlighting the benefits of perps for retail traders, including better order execution, lower fees, and the ability to hold both long and short positions simultaneously. Both traders emphasized the importance of margin efficiency in perps, which allows them to manage risk effectively across different venues and tokens. The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than only during market hours. Ong recalled an instance during the Iran conflict, where tokenized oil trading on Hyperliquid saw a significant surge in volume over a weekend, while traditional markets were closed. Krenn noted that perps have become a powerful tool for trading various assets, sidestepping the need for traditional infrastructure. Despite the benefits, traders are wary of the funding rate, which can change over time and is typically charged every eight hours. This exposes traders to a floating rate, making it challenging to quantify and hedge. 'It's not just a tiny fee you can ignore,' Ong warned. 'If you hold positions for extended periods, it can potentially balloon to the point where a profitable trade loses money.' The traders also discussed the myth of the 'safe trade,' where being right and well-capitalized is not enough to protect against losses. Krenn attributed the issue to the crypto exchange margin model, rather than perps themselves. He emphasized the importance of distinguishing between perpetual and dated futures, as well as the need for a proper clearing house with a mutualized default fund. Krenn also offered an insight that challenges conventional wisdom about perp risk, suggesting that being long is the structurally safer side due to the ease of arbitraging away positive funding. However, when the funding rate is negative, the arbitrage becomes more complex, and the gap between perp and spot prices can persist. In conclusion, perps have democratized futures trading by addressing issues of access, cost, and margin efficiency. Nevertheless, they come with unique challenges, particularly the volatile funding-rate exposure that cannot be quantified or hedged. 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.'