When discussing crypto trading with experienced traders, perpetual futures, or 'perps', are often the first topic that comes up. These derivative contracts allow traders to control large positions with minimal capital.
Unlike standard futures, perps do not have an expiry date, making them a popular choice among traders. However, perps are not without their drawbacks, and traders are concerned about the funding rates and margin efficiency. To better understand the benefits and risks of perps, we spoke with traders who have thrived in the perpetual futures market.
They explained that perps offer deep liquidity, low trading fees, and high margin efficiency, making them an attractive option for both institutional and retail traders. Nevertheless, the funding rate, which is a recurring cost for keeping positions open, is a significant concern for traders. The funding rate is essentially an interest charge that accrues over time, and traders are worried about how much it could add up. So, why do traders prefer perps?
According to Lucas Krenn, a derivatives trader, perps are the primary tool for crypto-native firms, as they offer better liquidity and lower costs compared to dated futures. Kenneth Ong, an independent trader, agrees, stating that perps provide better fills, lower fees, and the ability to run both long and short positions simultaneously. However, both traders acknowledge that the funding rate is a significant concern, as it can be volatile and difficult to quantify.
The funding rate is typically charged every eight hours and can be a burden for traders who hold positions for extended periods. In addition to the funding rate, traders are also concerned about the risk of liquidations, which can occur when the market moves against them. Despite these risks, perps have democratized futures trading by providing access to a leveraged market with low costs and high margin efficiency. Nevertheless, traders must be aware of the unique pain points associated with perps, including the volatile funding-rate exposure that cannot be quantified or hedged.
As the crypto market continues to evolve, it is essential for traders to understand the benefits and risks of perps and to develop strategies to mitigate these risks. In conclusion, perps have revolutionized the crypto trading landscape by providing a low-cost and efficient way to trade futures. However, traders must be cautious of the funding rate and other risks associated with perps, and must develop strategies to manage these risks effectively.