The Dual Nature of Perpetual Futures in Crypto Trading

When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic that arises. These derivatives contracts allow traders to control larger positions with less capital. Unlike standard futures, perps do not have an expiration date. For traders of alternative cryptocurrencies, perps are often the only viable option for derivatives trading due to the illiquidity of dated futures and the spot market. CoinDesk spoke with traders who have thrived in the perps market to understand what sets perps apart, how they cater to both institutional and retail traders, and the associated costs. The traders uniformly praised perps for their deep liquidity, low trading fees, and efficient margin use. However, they also expressed concerns about funding rates, which are recurring costs for maintaining open positions. Funding rates are essentially interest charges that accrue over time, and traders worry about their potential impact on profitability. The popularity of perps stems from necessity rather than choice. According to Lucas Krenn, a derivatives trader, perps are the foundation of his firm's operations, especially for cryptocurrencies outside of Bitcoin and Ethereum, where dated futures lack liquidity. Kenneth Ong, an independent trader, echoed this sentiment, highlighting perps' advantages for retail traders, including better execution prices, lower fees, and the ability to hold both long and short positions simultaneously. Both traders emphasized margin efficiency as a key benefit of perps, allowing for greater trading exposure with less capital. The perpetual nature of perps has also changed how price discovery occurs, with traders reacting to news and events outside traditional market hours. Despite the benefits, traders are wary of the funding rate, which can be a significant burden, especially for long-term positions. Unlike dated futures, where the interest rate is known upfront, perps have funding rates that change over time and are typically charged every eight hours. This exposes traders to unpredictable costs that cannot be easily hedged. The funding rate can potentially turn a profitable trade into a loss if not managed correctly. The traders noted that while perps offer many advantages, they are not without risks, particularly the volatile funding rate exposure. As the crypto market continues to evolve, the importance of understanding and managing these risks will only grow.