The Double-Edged Sword 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, and they have become a staple in the crypto market. Unlike traditional futures, perps do not have an expiration date, making them a unique and attractive option for traders. For altcoin traders, perps are often the only viable option for derivatives trading, as dated futures for these assets are typically illiquid. The spot market is also not a viable option for many traders, as it is often seen as a means for long-term holding rather than active trading. CoinDesk spoke with several traders who have thrived in the perps market, including Lucas Krenn, a derivatives trader at STS Digital, and Kenneth Ong, an independent trader. They shared their insights on what makes perps different from other derivatives and how they help traders manage risk efficiently. One of the key benefits of perps is their deep liquidity, which allows for large buy and sell orders to be executed at stable prices. Additionally, perps offer low trading fees and efficient margin usage, making them an attractive option for both retail and institutional traders. However, traders also expressed concerns over funding rates, which are recurring costs associated with keeping positions open. These rates can add up quickly and become a significant burden for traders. According to Krenn and Ong, the funding rate is a major concern for traders, as it can be difficult to quantify and hedge. A dated futures contract, on the other hand, provides a clear interest rate upfront, allowing traders to make more informed decisions. Perps, on the other hand, have a funding rate that changes over time and is typically charged every eight hours, leaving traders exposed to a floating rate. The traders also discussed the benefits of perps in terms of price discovery, as they allow for trading to occur at any time, rather than just during traditional market hours. This has led to a shift in price discovery, with perps playing a key role in setting prices for various assets. However, the traders also noted that perps are not without their unique pain points, including the volatile funding-rate exposure that cannot be quantified or hedged. As Krenn put it, 'Until there is a liquid dated curve in crypto, the whole market is carrying an interest rate exposure it cannot price and cannot hedge.' In conclusion, perps have democratized futures trading by providing a low-cost and efficient way for traders to access the market. However, they also come with unique challenges, such as funding rate exposure, that traders must be aware of and manage effectively.