The Dual Nature of Perpetual Futures: Benefits and Drawbacks According to Crypto Traders

When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic of conversation. 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 unique and attractive option for traders. For altcoin traders, perps are frequently the only viable derivatives option, as dated futures for these assets are often illiquid and spot markets are not a priority for those who do not plan to hold their assets long-term. Traders who have thrived in the perps market explain that these contracts offer several advantages, including deep liquidity, low trading fees, and efficient margin usage, allowing for greater trading exposure with less collateral. However, traders also express concerns about funding rates, which are recurring costs associated with keeping positions open. These rates can add up over time and are a significant consideration for traders. The popularity of perps can be attributed to their necessity in the crypto market, particularly for assets other than bitcoin and ether, where dated futures lack liquidity. According to Lucas Krenn, a derivatives trader, perps are the primary tool for crypto-native firms due to the lack of liquidity in dated futures. Kenneth Ong, an independent trader, highlights the benefits of perps for retail traders, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Both traders emphasize the importance of margin efficiency in perps, which allows for the management of risk across different venues and tokens with minimal capital. The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than only during market hours. This has led to increased trading activity in perps, particularly during significant events. Despite the benefits of perps, traders are wary of funding rates, which can be volatile and difficult to quantify. Krenn notes that funding rates can be a significant burden for traders, particularly if they hold positions for extended periods. Ong warns that funding rates can potentially turn a profitable trade into a loss if not managed properly. The traders also discuss the risks associated with perps, including liquidations and the socialization of losses by exchanges. Krenn argues that these risks are not unique to perps but are rather a result of the crypto exchange margin model. He emphasizes the importance of proper clearing houses and mutualized default funds in mitigating these risks. In conclusion, perps have democratized futures trading by providing access, lowering costs, and increasing margin efficiency. However, they also come with unique challenges, particularly the volatile funding-rate exposure that can be difficult to quantify and hedge. As the crypto market continues to evolve, it is essential for traders to understand the benefits and drawbacks of perps and to develop strategies to manage the associated risks.