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

In the world of crypto trading, perpetual futures have become a staple for many traders. These derivatives contracts allow traders to control large positions with minimal capital, but they also come with unique challenges. To better understand the pros and cons of perps, CoinDesk spoke with experienced traders who shared their insights on what makes perps different from other derivatives, how they help traders manage risk, and what costs are associated with trading them. According to Lucas Krenn, a derivatives trader at STS Digital, perps are the go-to tool for crypto native firms due to their deep liquidity and low fees. However, he also highlighted the concern surrounding funding rates, which can be a significant burden for traders. Kenneth Ong, an independent trader, echoed Krenn's sentiments, noting that perps offer better fills, lower fees, and the ability to run both long and short positions simultaneously. Despite the benefits, both traders cautioned that funding rates can be a major issue, particularly for traders who hold positions for extended periods. The funding rate, which is typically charged every eight hours, can be a significant expense that can turn a profitable trade into a loss. As Krenn put it, 'The funding rate is unquantifiable at the point of trade and unhedgeable afterwards.' Ong was more blunt, stating that 'funding's not just some tiny fee you can ignore. It's not. If you hold positions for long periods, it can potentially balloon to the point where a profitable trade loses money.' The traders also discussed the myth of the safe trade, highlighting that even profitable trades can be force-closed due to exchange margin models. Krenn noted that the problem lies not with perps themselves, but with the exchange's margin model. He also pointed out that the distinction between perpetual and dated futures is not as important as whether the exchange has a proper clearing house with a mutualized default fund. In terms of risk, Krenn offered a unique insight, suggesting that being long is the structurally safer side due to the ease of arbitraging away positive funding. However, when the funding rate is negative, the arbitrage becomes more difficult, and the gap between perp and spot prices can persist. This asymmetry can lead to funding rates staying extremely negative for long stretches, making the short side more vulnerable to unbounded costs. As the crypto market continues to evolve, it's clear that perps will remain a crucial part of the trading landscape. However, traders must be aware of the unique challenges associated with these contracts, particularly the volatile funding-rate exposure that can't be quantified or hedged. 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.'