The Double-Edged Sword of Perpetual Futures: Crypto Traders Weigh In

When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic of conversation. These derivatives contracts allow traders to control large positions with minimal capital. Unlike standard futures, perps have no expiration date, making them a popular choice among traders. For altcoin traders, perps are frequently the only viable option for derivatives trading, as dated futures contracts for these assets tend to be illiquid. In a conversation with CoinDesk, traders who have thrived in the perps market explained what sets perps apart from other derivatives, how they cater to the needs of both institutional and retail traders, and the associated costs. The traders unanimously agreed that perps are attractive due to their deep liquidity, low trading fees, and efficient margin usage. However, they also expressed concerns about the funding rates, which can significantly 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, emphasized that perps are not just one of many tools, but rather the primary instrument for crypto-native firms. He noted that dated futures contracts are often illiquid, which can lead to significant price swings and poor execution for traders. Independent trader Kenneth Ong highlighted the benefits of perps from a retail perspective, including better order execution, lower fees, and the ability to hold both long and short positions simultaneously. Ong and Krenn both agreed that margin efficiency is a major draw for perps, as they allow traders to manage risk effectively across multiple venues and tokens. Perps require only a fraction of the position's value as collateral, enabling traders to split their capital across various exchanges and tokens. The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than only during market hours. Traders pointed out that this has led to more efficient price discovery, as news and events can trigger price movements at any time. However, they also warned about the risks associated with perps, particularly the funding rates. Krenn and Ong cautioned that funding rates can be unpredictable and may become a significant burden for traders who hold positions for extended periods. They emphasized that the funding rate is unquantifiable at the time of trade and cannot be hedged once the position is open. Ong bluntly stated that the funding rate is not a minor fee, but rather a substantial cost that can potentially turn a profitable trade into a loss. The traders also addressed the criticism that perps faced during the October 10 crash, which triggered widespread deleveraging across the market. Krenn argued that the problem was not with perps, but rather with the crypto exchange margin model. He emphasized that the distinction between perpetual and dated futures is not the primary concern, but rather whether the exchange has a proper clearing house with a mutualized default fund. Krenn offered an interesting insight into the asymmetry of perp risk, suggesting that being long is structurally safer than being short. He explained that positive funding rates can be easily arbitraged away, but negative funding rates can persist due to constraints on shorting the underlying token. This asymmetry can lead to funding rates remaining extremely negative for extended periods. In conclusion, perps have democratized futures trading by providing access, low costs, and efficient margin usage. However, they also come with unique challenges, particularly the volatile funding-rate exposure that cannot be quantified or hedged. As Krenn put it, the whole market is carrying an interest rate exposure that it cannot price or hedge, making funding a 'tax' that everyone pays for easy access to this leveraged market.