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

When discussing cryptocurrency trading with experienced traders, the topic of perpetual futures, or 'perps,' inevitably comes up. These derivatives contracts enable traders to control large positions with minimal capital. Perps function similarly to standard futures, but without an expiration date. For traders of alternative cryptocurrencies, perps are often the only viable option for derivatives trading, as dated futures contracts for these assets are typically illiquid. In contrast, the spot market is often an afterthought for traders who don't plan to hold onto their assets long-term. To better understand the appeal of perps, CoinDesk spoke with traders who have thrived in the perpetual futures market. They highlighted the advantages of perps, including their deep liquidity, low trading fees, and efficient margin usage. However, traders also expressed concerns about the funding rates associated with perps, which can add up over time. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the primary tool for crypto-native firms, as they offer a more efficient and cost-effective way to trade. Kenneth Ong, an independent trader, echoed this sentiment, citing the benefits of perps for retail traders, including better execution prices, lower fees, and the ability to hold both long and short positions simultaneously. Both Krenn and Ong emphasized the importance of margin efficiency in perps, which allows traders to manage risk more effectively. The perpetual nature of perps has also shifted the dynamics of price discovery, enabling traders to react to news and events in real-time, rather than being limited to traditional market hours. Nevertheless, traders are wary of the funding rates associated with perps, which can be unpredictable and potentially costly. As Krenn noted, the funding rate is a 'tax' that everyone pays for access to the leveraged market, and it's essential to understand and manage this risk. In conclusion, perps have democratized futures trading by providing a more accessible and cost-effective way to trade, but they also present unique challenges, particularly with regards to funding rate exposure. As the crypto market continues to evolve, it's crucial for traders to understand the intricacies of perps and develop strategies to mitigate their risks.