When discussing crypto trading with experienced traders, the conversation often revolves around perpetual futures, or 'perps' – a type of derivatives contract that enables traders to control large positions with minimal capital. These contracts function similarly to standard futures but lack an expiration date, making them a popular choice among traders. For altcoin traders, perps are often the only viable option for derivatives trading, as dated futures contracts for these assets tend to be illiquid. The spot market, on the other hand, is generally used for long-term holdings.
To better understand the appeal of perps, we spoke with traders who have thrived in this market, and their responses were overwhelmingly positive, citing the deep liquidity, low trading fees, and efficient margin usage as major advantages. However, they also expressed concerns over the funding rates, which can add up over time and negatively impact trading profits. 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 dated futures contracts lack liquidity and are often too expensive to replace upon expiration. Kenneth Ong, an independent trader, shared a similar perspective, highlighting the benefits of perps for retail traders, including better fills, lower fees, and the ability to run both long and short positions simultaneously.
Both traders emphasized the importance of margin efficiency, which allows them to manage risk effectively across different venues and tokens. The perpetual nature of perps has also shifted price discovery, enabling traders to react to news and events in real-time, rather than waiting for traditional market hours. This has been particularly notable in the tokenized oil trading market, where perps have allowed traders to respond quickly to geopolitical events. While perps offer many advantages, they also come with unique challenges, such as funding rates, which can be difficult to predict and manage.
Krenn and Ong both expressed concerns over the funding rate, which can become a significant burden for traders, especially those holding positions for extended periods. The funding rate is typically charged every eight hours and can be volatile, making it challenging for traders to lock in a fixed rate. Furthermore, the funding rate is often unquantifiable at the point of trade and unhedgeable once the position is open. In addition to funding rates, perps have also faced criticism for their role in liquidations, which can occur when traders are unable to meet margin requirements.
However, Krenn argued that this is not a problem with perps themselves, but rather with the crypto exchange margin model, which can socialize losses onto winners. The key distinction, according to Krenn, is between facing a proper clearing house with a mutualized default fund and an exchange that socializes losses onto winners.
Another important consideration for traders is the asymmetry between long and short positions, which can be difficult to price correctly. Krenn noted that being long is often the structurally safer side, as positive funding is easy to arbitrage away, whereas negative funding can persist for extended periods, making it challenging for traders to compress the gap between perp and spot prices. In conclusion, while perps have democratized futures trading by providing access, low costs, and efficient margin usage, they also come with unique pain points, such as volatile funding-rate exposure. 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.' For now, funding remains the 'tax' that everyone pays for easy access to this leveraged market.