The Double-Edged Sword of Perpetual Futures in Crypto Trading

When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' inevitably arises. These derivatives contracts enable traders to control larger positions with less capital, as they have no expiration dates. While bitcoin and ether traders can explore various markets, including spot, futures, options, and structured products, perps often represent the sole derivatives avenue for traders of other altcoins, due to the illiquidity of dated futures and the limited spot market. To understand what makes perps distinct from other derivatives and how they cater to the needs of both institutional and retail traders, CoinDesk spoke with traders who have thrived in the perpetual futures market. Their responses highlighted the deep liquidity, low trading fees, and efficient margin usage of perps, which allow traders to maximize their exposure with minimal collateral. However, traders also expressed concerns about the funding rates, a recurring cost associated with maintaining open positions. This cost can accumulate over time and impact the profitability of trades. The popularity of perps can be attributed to their necessity, as dated futures often lack liquidity and incur significant costs when replaced with new contracts at expiry. Lucas Krenn, a derivatives trader at STS Digital, emphasized that perps are the primary tool for crypto-native firms, as they provide a more efficient and cost-effective way to manage risk. Kenneth Ong, an independent trader, shared a similar perspective, highlighting the advantages of perps, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. The perpetual futures market has also shifted the dynamics of price discovery, allowing it to occur around the clock, rather than being limited to traditional market hours. This has significant implications for traders, as they can react to news and events in real-time, rather than waiting for markets to open. Despite the benefits of perps, traders are wary of the funding rate, which can be volatile and difficult to quantify. Krenn and Ong both expressed concerns about the funding rate, citing its potential to erode profits and create unforeseen risks. The funding rate is a floating rate that changes over time and is typically charged every eight hours, leaving traders exposed to uncertainty and unable to lock in a fixed rate. This unpredictability can lead to significant losses, especially for traders who hold positions for extended periods. In conclusion, while perps have democratized access to futures trading by addressing issues of cost, margin efficiency, and accessibility, they also introduce unique challenges, such as the unpredictable funding rate exposure. As Krenn noted, the crypto market is currently carrying an interest rate exposure that cannot be accurately priced or hedged, making funding a 'tax' that everyone pays for easy access to this leveraged market.