The Double-Edged Sword of Perpetual Futures: Benefits and Drawbacks According to Crypto Traders

When discussing crypto trading with experienced traders, the conversation often revolves around perpetual futures, or 'perps' - a type of derivatives contract that enables traders to control large positions with minimal capital. Unlike standard futures, perps do not 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 perps market, and their responses highlighted the key benefits of perps, including their deep liquidity, low trading fees, and efficient margin usage. However, traders also expressed concerns over funding rates, which can add up over time and eat into profits. According to Lucas Krenn, a derivatives trader at STS Digital, perps are the 'plumbing underneath everything' his firm does, particularly for crypto-native firms. Krenn noted that dated futures are often illiquid, making perps a more attractive option. Independent trader Kenneth Ong echoed Krenn's sentiments, citing the advantages of perps, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Ong also highlighted the importance of margin efficiency, which allows traders to manage risk effectively across different venues and tokens. The always-on nature of perps has also shifted price discovery to occur around the clock, rather than just during market hours. This has led to a phenomenon where prices are being repriced in real-time, even outside of traditional market hours. While perps offer many benefits, they also come with unique challenges, particularly with regards to funding rates. Funding rates can be volatile and unpredictable, making it difficult for traders to quantify and hedge their exposure. As Krenn noted, 'it is unquantifiable at the point of trade and unhedgeable afterwards.' Ong also expressed concerns over funding rates, stating that they can 'potentially balloon to the point where a profitable trade loses money.' The issue of funding rates is further complicated by the fact that perps are often traded on crypto exchanges, which can socialize losses and force-close positions, even for profitable trades. Krenn argued that this is not a problem with perps themselves, but rather with the crypto exchange margin model. The distinction between perps and dated futures is also important, as Krenn noted that the key difference is not between perpetual and dated futures, but rather between facing a proper clearing house with a mutualized default fund or an exchange that socializes losses onto winners. In terms of risk, Krenn offered an interesting insight, suggesting that being long is often the structurally safer side, as positive funding is easy to arbitrage away. However, when funding rates are negative, the arbitrage is more difficult, and the gap between perp and spot prices can persist, leading to extremely negative funding rates. Ultimately, perps have democratized futures trading by providing access, cost, and margin efficiency, but they also come with unique pain points, particularly with regards to funding rate exposure. As Krenn put 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.'