The Pros and Cons of Perpetual Futures: Insights from Crypto Traders

When discussing crypto trading with experienced traders, perpetual futures, also known as "perps," are often the first topic that comes up. These derivatives contracts allow traders to control large positions with minimal capital. Perps function similarly to standard futures but lack an expiration date. For traders of alternative cryptocurrencies, perps may be the only viable option for derivatives trading, as dated futures for these assets are often illiquid, and the spot market is not a priority for those who don't plan to hold onto their assets. CoinDesk spoke with successful traders in the perpetual futures market to understand what sets perps apart from other derivatives, how they cater to the needs of both institutional and retail traders, and the costs associated with perps trading. The traders' responses were overwhelmingly positive, citing perps' deep liquidity, low trading fees, and high margin efficiency. However, they also expressed concerns about funding rates, which are recurring costs for maintaining open positions. Funding rates can be thought of as interest charges that accrue over time. To understand why perps are so popular, with daily trading volumes exceeding $200 billion, traders point to their necessity. Lucas Krenn, a derivatives trader at STS Digital, noted that perps are the primary tool for crypto-native firms, as dated futures lack liquidity outside of bitcoin and ether. The process of replacing dated futures contracts at expiration is costly, making perps a more efficient option. Kenneth Ong, an independent trader, highlighted the benefits of perps for retail traders, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Both Krenn and Ong emphasized the importance of margin efficiency in perps, which allows traders to manage risk across multiple venues and tokens with a single pool of capital. The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than only during market hours. This was evident during the Iran conflict, when tokenized oil trading on Hyperliquid saw a surge in volume over a weekend, with much of the price reaction occurring before traditional markets opened. Traders see perps as a powerful instrument that will continue to gain momentum in the coming years, with the potential to replace dated futures altogether. However, they also warned about the risks associated with funding rates, which can be unpredictable and difficult to hedge. The funding rate is typically charged every eight hours and can become a significant burden if the market doesn't move as expected. Krenn and Ong stressed that funding rates are a major concern, as they can't be quantified at the time of trade and can't be hedged once the position is open. The traders also discussed the myth of the safe trade, citing the example of the October 10 crash, which triggered widespread deleveraging across both losing and profitable positions. Krenn argued that the problem was not with perps themselves but with the crypto exchange margin model. He noted that dated futures on the same venues face the same issues with insurance funds and deleveraging queues. Krenn also offered an interesting insight into the asymmetry of perp risk, suggesting that being long is the structurally safer side. His logic is that positive funding is easy to arbitrage away, but negative funding can persist due to constrained arbitrage. This asymmetry is often not accounted for in risk models. In conclusion, perps have democratized futures trading by addressing issues of access, cost, and margin efficiency, but they also come with unique challenges, such as volatile funding-rate exposure. As Krenn put it, the whole market is carrying an interest rate exposure that cannot be priced or hedged until a liquid dated curve emerges in crypto.