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 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 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 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 and impact profitability. According to Lucas Krenn, a derivatives trader at STS Digital, perps are the backbone of their firm's operations, offering a necessary tool for navigating the crypto market. Kenneth Ong, an independent trader, echoed this sentiment, highlighting the benefits of perps for retail traders, including better fills, lower fees, and the ability to run both long and short positions simultaneously. Both traders emphasized the importance of margin efficiency in perps, which allows for greater trading exposure with minimal capital. The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than just during market hours. This has led to increased trading activity in tokenized commodities, such as oil, during off-market hours. Despite the advantages of perps, traders are wary of the funding rates, which can be volatile and difficult to quantify. Krenn and Ong warned that these rates can become a significant burden for traders, especially those holding positions for extended periods. The lack of a built-in mechanism to lock in funding rates exposes traders to floating rates, making it challenging to predict and manage costs. The traders also addressed the criticism of perps following the October 10 market crash, which led to widespread deleveraging and liquidations. Krenn argued that the issue was not with perps themselves, but rather with the crypto exchange margin model, which socializes losses onto winners. He emphasized that the key distinction is not between perpetual and dated futures, but rather between proper clearing houses with mutualized default funds and exchanges that socialize losses. Krenn also offered an insightful perspective on the asymmetry of perp risk, suggesting that being long is structurally safer due to the ease of arbitraging away positive funding. In contrast, negative funding rates can persist for extended periods, making the short side more vulnerable to unbounded costs. Ultimately, perps have democratized futures trading by providing access, affordability, and margin efficiency, but they also come with unique challenges, such as volatile funding-rate exposure. As Krenn noted, until a liquid dated curve emerges in crypto, the market will continue to carry an interest rate exposure that cannot be accurately priced or hedged.