The Double-Edged Sword of Perpetual Futures: Insights from Crypto Traders

When discussing crypto trading with experienced traders, the conversation often turns to perpetual futures, or 'perps' - a type of derivatives contract that allows traders to control large positions with minimal capital. Unlike traditional futures, perps do not have an expiry date, making them a popular choice among traders. For altcoin traders, perps are often the only viable option for derivatives trading, as dated futures for these assets are typically illiquid. CoinDesk spoke with traders who have thrived in the perpetual futures market to understand what sets perps apart from other derivatives and how they cater to the needs of both institutional and retail traders. The traders unanimously praised perps for their deep liquidity, low trading fees, and efficient margin usage, which enables them to manage risk effectively. However, they also expressed concerns over funding rates, a recurring cost associated with keeping positions open. Funding rates can be thought of as an interest charge that accrues over time, and traders are worried about the potential impact on their profits. One trader, Lucas Krenn, noted that perps are not just one tool among many, but rather the foundation of his firm's trading activities. He explained that dated futures are often illiquid, making it difficult to execute large trades without significantly affecting market prices. Another trader, Kenneth Ong, highlighted the benefits of perps from a retail trader's perspective, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Ong also emphasized the importance of margin efficiency, which allows traders to manage risk effectively across multiple venues and tokens. The traders also discussed the role of perps in price discovery, noting that the always-on nature of these contracts enables price discovery to occur around the clock, rather than just during traditional market hours. This has significant implications for traders, as it allows them to react quickly to market-moving events. Despite the many benefits of perps, traders are also aware of the potential risks, including liquidations and funding rate exposure. Krenn noted that funding rates can be a significant burden for traders, particularly if they hold positions for extended periods. Ong also expressed concern over the potential for funding rates to 'balloon' and turn a profitable trade into a loss. The traders also touched on the topic of safe trades, noting that even profitable positions can be force-closed during times of market stress. Krenn argued that this is not a problem with perps themselves, but rather with the crypto exchange margin model. He emphasized the importance of proper clearing houses and mutualized default funds in managing risk. Finally, Krenn offered an interesting insight into the asymmetry of perp risk, noting that being long is often the structurally safer side. He explained that positive funding rates can be easily arbitraged away, while negative funding rates can persist for extended periods, making it more difficult for traders to manage risk. Overall, perps have democratized futures trading by providing access to a leveraged market, but they also come with unique challenges, particularly with regards to funding rate exposure. As Krenn noted, until there is a liquid dated curve in crypto, the whole market will be carrying an interest rate exposure that cannot be priced or hedged.