In the world of crypto trading, perpetual futures have become a staple for many traders, offering a unique combination of flexibility and leverage. However, as with any financial instrument, perps come with their own set of advantages and disadvantages. To gain a deeper understanding of the benefits and drawbacks of perps, we spoke with experienced traders who have navigated the complexities of this market.
One of the primary advantages of perps is their deep liquidity, which allows traders to easily enter and exit positions without significantly impacting the market price. Additionally, perps offer low trading fees, making them an attractive option for traders who frequently buy and sell.
Another key benefit of perps is their ability to provide efficient margin usage, enabling traders to maximize their exposure while minimizing their capital outlay. However, perps also come with unique challenges, particularly with regards to funding rates. Funding rates are essentially interest charges that traders pay to maintain their positions, and these rates can fluctuate over time.
This unpredictability can make it difficult for traders to accurately assess their potential profits and losses. According to Lucas Krenn, a derivatives trader at STS Digital, the funding rate is a significant concern for traders, as it can be unquantifiable at the point of trade and unhedgeable afterwards. Kenneth Ong, an independent trader, echoes this sentiment, stating that the funding rate can potentially balloon to the point where a profitable trade loses money.
Despite these challenges, many traders believe that perps have democratized futures trading, providing access to a wider range of participants. Nevertheless, the volatile funding-rate exposure remains a significant pain point, and traders must carefully consider this factor when navigating the perps market. As Krenn notes, until a liquid dated curve in crypto emerges, the entire market will continue to carry an interest rate exposure that cannot be priced or hedged. In the meantime, funding rates will remain the tax that everyone pays for easy access to this leveraged market.