When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' inevitably comes up. These derivatives contracts allow traders to control large positions with minimal capital. Unlike standard futures, perps have no expiration date, making them a unique and attractive option for traders. For altcoin traders, perps are often the only viable avenue for derivatives trading, as dated futures contracts for these assets are typically illiquid.
The spot market is also not a viable option for traders who don't plan to hold their positions long-term. To understand what makes perps different from other derivatives and how they cater to the needs of institutional and retail traders, we spoke to traders who have thrived in the perpetual futures market.
They highlighted the deep liquidity, low trading fees, and efficient margin usage as the primary advantages of perps. However, they also expressed concerns about 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 'plumbing underneath everything' the firm does. For crypto-native firms, perps are not just one tool among many, but the primary tool.
Dated futures, on the other hand, are often illiquid and require costly replacements at expiration. Kenneth Ong, an independent trader, echoed this sentiment, citing the better fills, lower fees, and ability to run both long and short positions via hedge mode as major advantages of perps. Both traders emphasized that margin efficiency is the real draw to perps, allowing traders to manage risk efficiently across different venues and tokens.
The always-on nature of perps has also shifted price discovery to occur around the clock, rather than just during market hours. However, the funding rate remains a significant concern for traders.
Unlike dated futures contracts, 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, which can become a burden if the market doesn't move as expected. As Krenn put it, 'It is unquantifiable at the point of trade and unhedgeable afterwards.' Ong was more blunt, stating that the funding rate 'can potentially balloon to the point where a profitable trade loses money.' The recent bear market has also highlighted the risks associated with perps, particularly the socialization of losses on exchanges. However, Krenn argued that this is not a problem with perps themselves, but rather with the crypto exchange margin model.
The distinction that matters is not between perpetual and dated futures, but between facing a proper clearing house with a mutualized default fund or an exchange that socializes losses onto winners. Krenn also offered an interesting 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 can persist due to constrained arbitrage.
The gap between perp and spot prices can remain wide, resulting in extremely negative funding rates. In conclusion, perps have democratized futures trading by solving the problems of access, cost, and margin efficiency. However, they are not without unique pain points, particularly the volatile funding-rate exposure that can't be quantified or hedged.
As Krenn noted, 'Until there is a liquid dated curve in crypto, the whole market is carrying an interest rate exposure it cannot price and cannot hedge.'