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

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, and their popularity has grown significantly. Unlike traditional futures, perps do not have an expiration date, making them an attractive option for traders. For altcoin traders, perps are often the only viable derivatives market, as dated futures contracts for these assets tend to be illiquid. The spot market is also less favorable for short-term traders, as it is primarily used for long-term holdings. Traders who have found success in the perps market attribute their success to the deep liquidity, low trading fees, and efficient margin usage. However, they also express concerns over funding rates, which can add up over time and eat into profits. Funding rates are essentially interest charges that accrue over the life of a trade, and they can be difficult to predict and hedge. Lucas Krenn, a derivatives trader, notes that perps are not just one tool among many, but rather the primary tool for crypto-native firms. He explains that dated futures contracts are often illiquid, making it difficult to enter or exit positions without significantly affecting the market price. This lack of liquidity leads to higher trading costs and reduced efficiency. In contrast, perps offer better fills, lower fees, and the ability to run both long and short positions simultaneously. Kenneth Ong, an independent trader, echoes Krenn's sentiments, citing the advantages of perps, including their ability to provide leverage and manage risk efficiently. Both traders agree that margin efficiency is a key draw to perps, as they allow traders to control larger positions with less capital. This is particularly important for traders who need to manage risk across multiple venues and assets. The always-on nature of perps has also shifted the dynamics of price discovery, allowing traders to react to news and events in real-time, rather than waiting for traditional market hours. Ong notes that during the Iran conflict, the tokenized oil market saw significant activity on perps, even when traditional markets were closed. Krenn sees a similar trend emerging in other asset classes, as perps become increasingly popular for trading and speculation. However, both traders caution against the risks associated with perps, particularly the funding rate. Krenn notes that the funding rate can be difficult to quantify and hedge, making it a significant risk for traders. Ong is more blunt, stating that the funding rate can 'potentially balloon to the point where a profitable trade loses money.' The traders also discuss the myth of the 'safe trade,' highlighting the risks associated with liquidations and the socialization of losses on exchanges. Krenn argues that the problem is not with perps themselves, but rather with the exchange margin models and the lack of proper clearing houses. He notes that dated futures contracts on the same venues face similar risks, and that the key distinction is between facing a proper clearing house with a mutualized default fund, or an exchange that socializes losses onto winners. Krenn also offers an interesting insight into the asymmetry of perp risk, noting that being long is often the structurally safer side. He explains that positive funding is easy to arbitrage away, but negative funding can persist for long stretches, making it difficult for traders to hedge. The takeaway from these traders is that perps have democratized futures trading, but they are not without unique risks and challenges. As Krenn puts it, 'Until there is a liquid dated curve in crypto, the whole market is carrying an interest rate exposure it cannot price and cannot hedge.'