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

The world of crypto trading has become increasingly dominated by perpetual futures, or 'perps,' which offer traders the ability to control large positions with minimal capital. Unlike traditional futures contracts, perps have no expiration date, making them a popular choice among both retail and institutional traders. However, this popularity comes with its own set of challenges, particularly with regards to funding rates, which can fluctuate significantly and eat into traders' profits. To better understand the advantages and disadvantages of perps, we spoke with experienced traders who have navigated this complex market. According to Lucas Krenn, a derivatives trader at market-making firm STS Digital, perps are the 'plumbing underneath everything' his firm does, particularly when it comes to trading altcoins. 'Outside of bitcoin and ether, dated futures liquidity is thin to the point of being unusable,' he explained. 'So perps are not just one tool among several; for a crypto-native firm, they are the tool.' Kenneth Ong, an independent trader with six years of experience, echoed Krenn's sentiments, highlighting the benefits of perps for retail traders. 'Perps offer better fills, lower fees, and the ability to run both sides at once via hedge mode,' he said. 'This is a big advantage over regulated venues like the CME, which typically net positions by default.' Both Krenn and Ong emphasized the importance of margin efficiency in perps, which allows traders to manage risk more effectively across different venues and tokens. 'Because perps require only a fraction of a position's value as collateral, the same pool of capital can be split across a dozen venues and still back meaningful positions at each one,' Krenn noted. Despite these advantages, perps are not without their drawbacks. Funding rates, which can change over time and are typically charged every eight hours, can become a significant burden for traders. 'It's unquantifiable at the point of trade and unhedgeable afterwards,' Krenn warned. Ong was even more blunt, stating that 'if you hold positions for long periods, it 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 exchanges with socialized loss models, which can lead to forced closures of positions and significant losses for traders. As Krenn pointed out, 'the problem isn't with perps; it's a crypto exchange margin model problem.' In conclusion, while perps have democratized access to futures trading and offer many benefits, they also come with unique challenges, particularly with regards to funding rates and liquidations. As the crypto market continues to evolve, it's essential for traders to understand these risks and develop strategies to mitigate them.