When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic that comes up. These derivatives contracts allow traders to control large positions with minimal capital. Unlike standard futures, perps do not have an 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 for these tokens are typically illiquid, and the spot market is not a viable option for short-term trading. CoinDesk spoke with traders who have thrived in the perpetual futures market to understand what sets perps apart from other derivatives, how they cater to the needs of both institutional and retail traders, and the costs associated with perps trading. The traders unanimously praised perps for their deep liquidity, low trading fees, and efficient margin usage, which enables traders to maximize their exposure with minimal collateral. However, they also highlighted the funding rate as a significant concern.
The funding rate is a recurring cost for maintaining open positions, essentially an interest charge that accrues over time. This rate can be a substantial burden, especially for long-term positions. To understand the appeal of perps, it's essential to consider the limitations of dated futures. According to Lucas Krenn, a derivatives trader at STS Digital, dated futures for altcoins are often too illiquid to be useful, making perps the go-to option.
Krenn notes that the process of replacing dated futures contracts at expiry is costly, which is why futures-based ETFs are often less efficient than spot ETFs. Kenneth Ong, an independent trader, echoes Krenn's sentiments, citing the benefits of perps, including better execution prices, lower fees, and the ability to hold both long and short positions simultaneously. Ong also highlights the advantage of perps over regulated venues like CME, which typically net positions by default.
Both Krenn and Ong emphasize that margin efficiency is a significant draw for perps, as they require only a fraction of the position's value as collateral, allowing traders to manage risk efficiently across multiple venues and tokens. The perpetual nature of perps has also shifted price discovery to a 24/7 process, with traders reacting to news and events as they happen, rather than waiting for traditional market hours. This has led to increased liquidity and more efficient price discovery.
However, the funding rate remains a concern, as it can be unpredictable and may become a significant burden for traders. Krenn and Ong warn that the funding rate can be a 'tax' on traders, especially those holding positions for extended periods. The lack of a built-in mechanism to lock in the funding rate exposes traders to floating rates, which can be difficult to hedge. In conclusion, while perps have democratized futures trading by providing access, low costs, and efficient margin usage, they are not without unique challenges, particularly the volatile funding-rate exposure.
As Krenn notes, until a liquid dated curve emerges in crypto, the market will continue to carry an interest rate exposure that is difficult to price and hedge.