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 that comes up. These derivatives contracts allow traders to control larger positions with less capital, and they have become a crucial tool for both retail and institutional traders. Unlike standard futures, perps do not have an expiry date, making them a popular choice for traders who want to hold positions for extended periods. However, perps also come with unique challenges, particularly with regards to funding rates, which can be a significant expense for traders. To better understand the advantages and disadvantages of perps, we spoke with traders who have extensive experience in the perpetual futures market. They explained how perps work, their benefits, and the costs associated with trading them. One of the primary advantages of perps is their deep liquidity, which allows traders to easily enter and exit positions. Additionally, perps offer low trading fees and high margin efficiency, making them an attractive option for traders who want to maximize their returns. However, traders also highlighted the importance of considering funding rates, which can be a recurring cost for holding positions open. Funding rates are essentially interest charges that accrue over time, and they can significantly impact a trader's profitability. According to Lucas Krenn, a derivatives trader at STS Digital, perps are the 'plumbing underneath everything' his firm does. He explained that outside of bitcoin and ether, dated futures liquidity is thin, making perps the primary tool for crypto-native firms. Kenneth Ong, an independent trader, shared a similar perspective, noting that perps offer better fills, lower fees, and the ability to run both long and short positions simultaneously. Both Krenn and Ong emphasized the importance of margin efficiency, which allows traders to manage risk effectively across different venues and tokens. Perps require only a fraction of a position's value as collateral, enabling traders to split their capital across multiple venues and still maintain meaningful positions. The always-on nature of perps has also shifted price discovery, allowing traders to react to news and events in real-time, rather than waiting for traditional markets to open. This has created new opportunities for traders, particularly in tokenized commodities and equities. However, perps also come with unique risks, particularly with regards to funding rates. Krenn and Ong both expressed concerns about the impact of funding rates on traders' profitability, noting that they can be difficult to quantify and hedge. The funding rate is typically charged every eight hours, and it can change over time, leaving traders exposed to floating rates. If the market does not move as expected, the funding rate can become a significant burden, potentially turning a profitable trade into a loss. In conclusion, perps have democratized futures trading by providing access to a leveraged market with low fees and high margin efficiency. However, they also come with unique challenges, particularly with regards to funding rates. As Krenn noted, 'Until there is a liquid dated curve in crypto, the whole market is carrying an interest rate exposure it cannot price and cannot hedge.' As the crypto market continues to evolve, it is essential for traders to understand the benefits and drawbacks of perps and to develop strategies to manage their risks effectively.