The Double-Edged Sword of Perpetual Futures in Crypto Trading

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. Unlike standard futures, perps have no expiry date, making them a unique and popular choice among traders. For altcoin traders, perps are often the only viable option for derivatives trading, as dated futures are typically illiquid and spot markets are not a priority for those who don't plan to hold onto their assets. CoinDesk spoke with traders who have thrived in the perps market, and they highlighted the key advantages of perps, including deep liquidity, low trading fees, and efficient margin use. However, traders also expressed concerns over funding rates, which can add up over time and eat into profits. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the 'plumbing underneath everything' his firm does. Outside of bitcoin and ether, dated futures liquidity is thin, making perps the go-to choice. Kenneth Ong, an independent trader, agrees, citing better fills, lower fees, and the ability to run both long and short positions simultaneously as major advantages. Both traders emphasize that margin efficiency is the real draw to perps, allowing them to manage risk efficiently across different venues and tokens. Perps have also shifted price discovery to a 24/7 process, with traders reacting to news and events in real-time. However, the funding rate remains a major concern, as it can be unpredictable and costly. Traders warn that funding rates can 'balloon' over time, turning profitable trades into losses. The issue of funding rates is not unique to perps, but rather a problem with the crypto exchange margin model. Krenn notes that the distinction between perps and dated futures is not the key issue, but rather whether traders are facing a proper clearing house with a mutualized default fund or an exchange that socializes losses onto winners. In conclusion, perps have democratized futures trading, but they are not without unique challenges, particularly the volatile funding-rate exposure that can't be quantified or hedged.