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,' often comes up. These derivatives contracts allow traders to control large positions with minimal capital, but they have no expiration date. For traders of alternative cryptocurrencies, perps may be the only viable option for derivatives trading, as traditional futures contracts for these assets are often illiquid. CoinDesk spoke with traders who have thrived in the perps market to understand what sets them apart from other derivatives and how they meet the needs of both institutional and retail traders. The traders interviewed emphasized the advantages of perps, including their deep liquidity, low trading fees, and efficient margin usage. However, they also expressed concerns about funding rates, which can add up over time and negatively impact trading profits. One trader, Lucas Krenn, noted that perps are not just one tool among many, but rather the primary tool for crypto-native firms. He explained that traditional futures contracts are often illiquid, making it difficult to execute large trades without significantly affecting market prices. Another trader, Kenneth Ong, highlighted the benefits of perps for retail traders, including better order execution, lower fees, and the ability to hold both long and short positions simultaneously. Ong also emphasized the importance of margin efficiency, which allows traders to manage risk effectively across multiple venues and tokens. The traders also discussed the impact of perps on price discovery, noting that the always-on nature of these contracts allows for more efficient price discovery, even outside traditional market hours. However, they also warned about the risks associated with perps, including liquidations and funding rates. Krenn noted that funding rates can be a significant burden for traders, particularly if they hold positions for extended periods. Ong added that funding rates can potentially turn a profitable trade into a loss. The traders also addressed the criticism that perps faced during the October 2022 market crash, when exchanges socialized losses to protect their systems. Krenn argued that the problem was not with perps themselves, but rather with the crypto exchange margin model. He noted that traditional futures contracts on the same venues face the same issues with insurance funds and deleveraging queues. Krenn also offered an insight into the asymmetry of perp risk, noting that being long is often the structurally safer side. He explained that positive funding is easy to arbitrage away, but negative funding can persist, making it more difficult for traders to short the underlying token. Overall, the traders agreed that perps have democratized futures trading by providing access to leveraged markets, but they also acknowledged the unique pain points associated with these contracts, particularly the volatile funding-rate exposure.