The Double-Edged Sword of Perpetual Futures: Insights from Crypto Traders

Discussing crypto trading with experienced traders often leads to conversations about perpetual futures, or 'perps' – a type of derivatives contract that allows for larger positions with less capital. Perps function similarly to standard futures, but without an expiration date. For traders of alternative cryptocurrencies, perps are often the only viable option for derivatives trading, as dated futures contracts for these assets tend to be illiquid. CoinDesk spoke with traders who have thrived in the perps market to understand what sets perps apart from other derivatives, how they cater to both institutional and retail traders, and the associated costs. The traders' responses highlighted the advantages of perps, including their deep liquidity, low trading fees, and efficient margin usage. However, they also expressed concern over funding rates – a recurring cost for maintaining open positions. Funding rates are essentially interest charges that accrue over time and can significantly impact trading costs. Lucas Krenn, a derivatives trader at STS Digital, noted that perps are the primary tool for crypto-native firms due to the lack of liquidity in dated futures contracts for assets other than Bitcoin and Ether. Kenneth Ong, an independent trader, echoed this sentiment, explaining that perps offer better 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 for greater trading exposure with less capital. The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than being limited to traditional market hours. This has led to increased trading activity in tokenized commodities, such as oil, during off-market hours. Despite the benefits, traders are wary of the funding rate, which can be volatile and difficult to predict. Krenn and Ong warned that funding rates can become a significant burden, especially for long-term positions. The lack of a built-in mechanism to lock in funding rates exposes traders to floating rates, making it challenging to quantify and hedge against potential losses. In conclusion, while perps have democratized futures trading by addressing issues of access, cost, and margin efficiency, they also introduce unique challenges, such as volatile funding-rate exposure. As the crypto market continues to evolve, it is crucial for traders to understand the intricacies of perps and their associated risks.