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

When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' often comes up. These derivatives contracts allow traders to control large positions with minimal capital. Perps function similarly to standard futures but lack an expiry 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. CoinDesk spoke with traders who have thrived in the perpetual futures market to understand what sets perps apart, how they cater to the needs of both institutional and retail traders, and the costs associated with perps trading. The traders unanimously agreed that perps are attractive due to their deep liquidity, low trading fees, and high margin efficiency. However, they also expressed concerns over funding rates, which are recurring costs for maintaining open positions. Funding rates can be thought of as interest charges that accrue over time, and traders are worried about their potential impact on trading costs. The popularity of perps can be attributed to their necessity, as dated futures contracts are often replaced with new contracts at expiry, incurring additional costs. Perps offer better fills, lower fees, and the ability to run both long and short positions simultaneously via hedge mode. Traders also appreciate the high margin efficiency of perps, which enables them to manage risk efficiently across different venues and tokens. The always-on nature of perps has shifted price discovery to occur around the clock, rather than only during market hours. Traders have observed that perps have become a powerful tool for trading various assets, including tokenized commodities and equities. However, they also caution that the funding rate is a significant concern, as it can be volatile and difficult to quantify. The funding rate is typically charged every eight hours and can become a burden if the market does not move as expected. Traders have learned to navigate the risks associated with perps, including liquidations and funding rates. While perps have democratized futures trading by providing access, low costs, and high margin efficiency, they are not without unique challenges. The volatile funding-rate exposure is a significant pain point, as it cannot be quantified while taking bets and cannot be hedged once the trade is on. As the crypto market continues to evolve, traders must adapt to the complexities of perps and develop strategies to mitigate their risks.