When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic that comes up. These derivatives contracts enable traders to control large positions with minimal capital.
Unlike standard futures, perps do not have an expiration date, making them a popular choice among traders. For altcoin traders, perps are often the only viable option for derivatives trading, as dated futures are typically illiquid and spot markets are not ideal for short-term trading.
CoinDesk spoke with traders who have thrived in the perps market to understand what sets them apart from other derivatives, how they cater to institutional and retail traders, and the associated costs. The traders unanimously praised perps for their deep liquidity, low trading fees, and efficient margin usage. However, they also expressed concerns about funding rates, which can add up over time and negatively impact trading profits.
Funding rates are essentially interest charges that accumulate as long as a position is open. To understand the appeal of perps, it's essential to consider the limitations of dated futures. According to Lucas Krenn, a derivatives trader at STS Digital, dated futures are often illiquid, making it difficult to execute large trades without significantly impacting prices.
Perps, on the other hand, offer better liquidity, lower fees, and the ability to hold both long and short positions simultaneously. Kenneth Ong, an independent trader, echoed Krenn's sentiments, highlighting the advantages of perps for retail traders. Ong noted that perps provide better execution prices, lower fees, and the ability to hedge positions.
Both Krenn and Ong emphasized the importance of margin efficiency in perps, which allows traders to manage risk across multiple venues and tokens with minimal capital. The perpetual nature of perps has also shifted price discovery to a 24/7 process, with news and events impacting prices outside of traditional market hours. The traders discussed how perps have become a crucial tool for trading various assets, including tokenized oil and commodities. However, they also warned about the risks associated with funding rates, which can be unpredictable and difficult to hedge.
Krenn and Ong cautioned that funding rates can become a significant burden for traders, especially those holding positions for extended periods. The lack of a built-in mechanism to lock in funding rates makes it challenging for traders to quantify and manage this risk.
In conclusion, while perps have democratized futures trading by providing access, low costs, and efficient margin usage, they also come with unique challenges, particularly the volatile 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 access to this leveraged market.