The Double-Edged Nature of Perpetual Futures in Crypto Trading

When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' often comes up. These derivatives contracts enable traders to control larger positions with less capital. Unlike standard futures, perps don't have an expiration 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 agreed that perps offer deep liquidity, low trading fees, and efficient margin usage, making them an attractive option. However, they also expressed concerns about the funding rates associated with perps, which can add up over time. Funding rates are essentially interest charges that accrue the longer a position is held. To understand why perps are so popular, it's essential to consider the limitations of dated futures. Lucas Krenn, a derivatives trader at STS Digital, noted that dated futures for assets other than bitcoin and ether are often illiquid, making perps the go-to choice for many traders. Kenneth Ong, an independent trader, shared a similar perspective, highlighting the benefits of perps for retail traders, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Both Krenn and Ong emphasized the importance of margin efficiency in perps, which allows traders to manage risk effectively across different venues and tokens. The perpetual nature of perps has also changed the way price discovery occurs, with traders reacting to news and events outside of traditional market hours. This has led to a shift in the way traders approach the market, with many using perps to trade on tokenized assets. While perps offer many benefits, they also come with unique challenges, such as funding rate exposure, which can be difficult to quantify and hedge. As Krenn pointed out, this exposure can be a significant burden for traders, particularly those holding positions for extended periods. The issue of funding rates is complex, and traders must carefully consider the potential costs and risks involved. In conclusion, perpetual futures have democratized access to futures trading, offering a unique combination of liquidity, low fees, and margin efficiency. However, traders must be aware of the potential pitfalls, including funding rate exposure, to navigate the market effectively.