When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' inevitably comes up. These derivatives contracts allow traders to control larger positions with less capital, but they also introduce unique challenges. Perps function similarly to standard futures, but without an expiration date, making them a crucial tool for traders, especially those dealing with altcoins.
The lack of liquidity in dated futures for altcoins and the limitations of the spot market make perps an attractive option. Traders praise perps for their deep liquidity, low trading fees, and efficient margin use, enabling them to manage risk across various venues and tokens. However, the funding rate, a recurring cost for keeping positions open, is a significant concern. This 'interest charge' can add up over time and impact profitability.
The perpetual nature of perps has also shifted price discovery, allowing for more flexible and continuous trading. Despite the benefits, traders like Lucas Krenn and Kenneth Ong point out that the funding rate is a major issue, as it can be unpredictable and difficult to hedge. They emphasize that margin efficiency is a key advantage of perps, but the funding rate can erode profits if not managed carefully. The always-on nature of perps has led to price discovery occurring at any time, not just during traditional market hours.
This has been observed during significant events, such as the Iran conflict, where tokenized oil trading saw a surge in volume on weekends. The traders believe that the 'perpification' of various assets will continue to gain momentum, offering a preview of what's to come for other commodities and equities. As the use of perps expands, it's essential to address the funding rate concern, which can potentially outweigh the benefits of these derivatives contracts. In the current crypto market, the funding rate exposure is a tax that everyone pays for access to the leveraged market, and until a liquid dated curve is established, the market will carry an interest rate exposure that cannot be priced or hedged.