The Double-Edged Sword of Perpetual Futures in Crypto Trading

When discussing crypto trading with experienced traders, the conversation often revolves around perpetual futures, or 'perps.' These derivatives contracts enable traders to control large positions with minimal capital. Unlike standard futures, perps do not have an expiry date, making them a popular choice among traders. For altcoin traders, perps are often the only viable option for derivatives trading, as dated futures for these assets are typically illiquid. The spot market, on the other hand, is mostly used for long-term holdings. To better understand the appeal of perps, CoinDesk spoke with traders who have thrived in this market. They cited the deep liquidity, low trading fees, and efficient margin usage as the primary advantages of perps. However, traders also expressed concerns over the funding rates, which can add up over time. Funding rates are essentially interest charges that accrue as long as a position is open. Lucas Krenn, a derivatives trader at STS Digital, and independent trader Kenneth Ong, highlighted the importance of perps in their trading strategies. Krenn noted that perps are the primary tool for crypto-native firms, as dated futures lack liquidity. Ong, on the other hand, emphasized the benefits of perps for retail traders, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Both traders praised the margin efficiency of perps, which allows them to manage risk effectively across multiple venues and tokens. The perpetual nature of perps has also shifted price discovery to a 24/7 process, with traders reacting to news and events in real-time. This has led to increased liquidity and more efficient price discovery. Nevertheless, traders are wary of the funding rates, which can be unpredictable and expensive. Krenn and Ong warned that funding rates can become a significant burden, especially for long-term positions. The funding rate is typically charged every eight hours and can be difficult to quantify and hedge. As the crypto market continues to evolve, perps are likely to play an increasingly important role. However, traders must be aware of the unique challenges associated with these contracts, including the volatile funding-rate exposure. In conclusion, perps have democratized futures trading by providing access to a leveraged market, but they also come with distinct pain points that traders must navigate.