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

Discussing crypto trading with experienced traders often leads to the topic of perpetual futures, or 'perps', which are derivatives contracts allowing for larger positions with less capital. These contracts function similarly to standard futures but lack an expiry date. For traders of alternative cryptocurrencies, perps are often the only available derivatives option due to illiquid dated futures and a less prominent spot market. Traders who have thrived in the perps market explain that these contracts offer benefits such as deep liquidity, low trading fees, and efficient margin use. However, there's also a recurring cost associated with keeping positions open, known as funding rates, which traders are concerned about due to their potential to add up over time. The popularity of perps can be attributed to their necessity, as dated futures are often too illiquid and expensive to replace upon expiry. Perps provide better trading conditions, including lower fees and the ability to hold both long and short positions simultaneously. The perpetual nature of these contracts has also shifted price discovery to occur at any time, rather than being limited to traditional market hours. Nonetheless, traders highlight the funding rate as a significant concern, as it can change over time and is typically charged every eight hours, leaving traders exposed to a floating rate without a mechanism to lock it in. This can lead to unforeseen costs, especially for long-term positions. The funding rate is considered more problematic than liquidations, as it can potentially turn a profitable trade into a loss. The issue lies not with perps themselves but with the crypto exchange margin model, which socializes losses onto winners. An important insight is that being long is structurally safer due to the ease of arbitraging away positive funding, whereas negative funding rates can persist due to constrained arbitrage, leading to an asymmetry that few risk models account for. In conclusion, while perps have made futures trading more accessible by solving issues of access, cost, and margin efficiency, they come with unique challenges, particularly the volatile funding rate exposure that cannot be quantified or hedged.