The Dual Nature of Perpetual Futures: Benefits and Drawbacks According to Crypto Traders

When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic that comes up. These derivatives contracts allow traders to control larger positions with less capital. Unlike standard futures, perps do not expire, making them a unique and attractive option for traders. For altcoin traders, perps are frequently the only viable derivatives market, as dated futures for these coins are often illiquid and the spot market is less relevant for short-term trading strategies. CoinDesk spoke with traders who have found success in the perpetual futures market to understand what sets perps apart, how they cater to both institutional and retail traders, and the associated costs. The traders unanimously praised perps for their deep liquidity, low trading fees, and high margin efficiency, which enables greater trading exposure with less collateral. However, they also highlighted a significant recurring expense: funding rates, essentially an interest charge that accrues over time. This concern was echoed by Lucas Krenn, a derivatives trader at STS Digital, and Kenneth Ong, an independent trader, who both emphasized the importance of perps due to the lack of liquidity in dated futures for assets other than bitcoin and ether. Krenn noted that perps are not just one tool among many but are fundamental to the operations of crypto-native firms. Ong, from a retail trader's perspective, appreciated perps for offering better fills, lower fees, and the ability to hold both long and short positions simultaneously. Both traders underscored the advantage of perps in terms of margin efficiency, allowing for the management of risk across different venues and tokens with less capital. The perpetual nature of perps has also shifted price discovery to a 24/7 process, reacting to news as it breaks, rather than being confined to traditional market hours. This was evident during the Iran conflict, where significant price movements occurred outside traditional trading hours. Despite the benefits, traders are wary of the funding rate, which can become 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, leaving traders exposed to floating rates without a mechanism to lock them in. Krenn and Ong warned that this rate can potentially turn a profitable trade into a loss if not properly managed. The issue of funding rates is compounded by the lack of a liquid dated curve in crypto, leaving the market with an interest rate exposure that cannot be accurately priced or hedged. In conclusion, while perps have democratized access to futures trading by addressing issues of access, cost, and margin efficiency, they also introduce unique challenges, most notably the volatile and unpredictable nature of funding-rate exposure.