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

When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic of conversation. These derivatives contracts allow traders to control large positions with minimal capital, offering a key advantage over standard futures: they never expire. For traders of alternative cryptocurrencies, perps are frequently the only viable option for derivatives trading, as dated futures are often illiquid and spot markets are an afterthought for non-long-term holders. To better understand the appeal of perps, CoinDesk spoke with traders who have thrived in the perpetual futures market. They cited the deep liquidity, low trading fees, and efficient margin usage as major benefits. However, they also expressed concerns over funding rates, which can add up over time and impact trading costs. One trader, Lucas Krenn, noted that perps are the backbone of his firm's operations, as dated futures lack liquidity outside of bitcoin and ether. Another trader, Kenneth Ong, highlighted the advantages of perps for retail traders, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Both traders emphasized the importance of margin efficiency in perps, which enables them to manage risk across multiple venues and tokens. The perpetual nature of perps has also shifted price discovery to a 24/7 process, with traders reacting to news and events as they happen, rather than waiting for traditional market hours. Despite the benefits, traders are wary of funding rates, which can be volatile and difficult to predict. Krenn noted that funding rates can be a significant burden, especially for long-term positions, and that they are unquantifiable and unhedgeable. Ong shared similar concerns, stating that funding rates can potentially turn a profitable trade into a loss. The traders also discussed the risks associated with perps, including liquidations and the socialization of losses on exchanges. Krenn argued that these risks are not unique to perps, but rather a result of the crypto exchange margin model. He also pointed out that being long is often the structurally safer side, as positive funding can be arbitraged away, while negative funding can persist due to limited arbitrage opportunities. Overall, perps have democratized futures trading by providing access, reducing costs, and increasing margin efficiency, but they also introduce unique challenges, such as volatile funding-rate exposure. As Krenn noted, the crypto market is currently carrying an interest rate exposure that it cannot price or hedge, making funding a 'tax' that everyone pays for access to this leveraged market.