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 larger positions with less capital. Unlike standard futures, perps do not have an expiration date, making them a unique and 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 is also less desirable for traders who do not plan to hold their assets long-term.
To better understand the appeal and challenges of perps, CoinDesk spoke with traders who have thrived in this market. Their responses highlighted the benefits of perps, including deep liquidity, low trading fees, and efficient margin usage.
However, they also expressed concerns about the funding rates associated with perps, which can add significant costs to trades. 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 lack liquidity outside of bitcoin and ether. Krenn explained that the process of replacing dated futures contracts at expiration is costly, making perps a more efficient choice. Independent trader Kenneth Ong shared a similar perspective, noting that perps offer better execution, lower fees, and the ability to hold both long and short positions simultaneously.
Ong started trading in the spot market but transitioned to perps due to their advantages. Both Krenn and Ong emphasized the importance of margin efficiency in perps, which allows traders to manage risk across multiple venues and tokens with a single pool of capital. The perpetual nature of perps has also shifted price discovery to a 24/7 process, rather than being limited to traditional market hours.
This was evident during the Iran conflict, when tokenized oil trading on Hyperliquid saw significant volume and price movements outside of regular market hours. Krenn believes that perps will continue to gain traction in various asset classes, as they provide a convenient and efficient way to trade without the need for traditional infrastructure.
However, traders must be aware of the funding rates associated with perps, which can be a significant expense. Unlike dated futures, which have a fixed interest rate, perps have a funding rate that changes over time and is typically charged every eight hours. This exposes traders to a floating rate, making it difficult to quantify and hedge against.
Krenn and Ong warned that the funding rate can become a substantial burden, especially for long-term positions. The lack of a built-in mechanism to lock in the funding rate makes it challenging for traders to manage this risk. In addition to funding rates, the crypto exchange margin model can also pose risks to traders. During the October 10 crash, exchanges socialized losses to protect their systems, resulting in the liquidation of both losing and profitable positions.
Krenn argued that this was not a problem with perps themselves, but rather with the exchange's margin model. He emphasized that the key distinction is not between perpetual and dated futures, but rather between facing a proper clearing house with a mutualized default fund or an exchange that socializes losses onto winners.
Krenn also offered an insight into the asymmetry of perp risk, suggesting that being long is the structurally safer side. This is because positive funding is easy to arbitrage away, whereas negative funding is more challenging to compress. As a result, the long side has a bounded cost and an unbounded upside, while the short side has a bounded upside and an unbounded cost. This asymmetry is often overlooked in risk models.
In conclusion, perps have democratized futures trading by providing access, low costs, and efficient margin usage. However, they also come with unique challenges, such as volatile funding-rate exposure. As Krenn noted, until a liquid dated curve is established in crypto, the market will continue to carry an interest rate exposure that cannot be priced or hedged. For now, funding rates remain the 'tax' that everyone pays for access to this leveraged market.