The world of cryptocurrency trading has seen a significant shift with the rise of perpetual futures, also known as 'perps.' These derivatives contracts allow traders to control large positions with minimal capital, but they come with unique challenges. To understand the appeal and drawbacks of perps, we spoke with experienced traders who have thrived in this market.
They shared their insights on what makes perps different from other derivatives, how they cater to both institutional and retail traders, and the costs associated with trading them. The traders we interviewed emphasized the importance of perps due to their deep liquidity, low trading fees, and efficient margin usage. However, they also expressed concerns about the funding rates, which can add up over time and impact trading decisions. One trader noted that perps are not just a tool among many, but the primary instrument for crypto-native firms, especially when dealing with altcoins.
The lack of liquidity in dated futures for these assets makes perps the go-to option. The perpetual nature of these contracts allows for continuous trading, enabling price discovery to occur around the clock, rather than being limited to traditional market hours. This has significant implications for traders, as they can react to news and events in real-time, rather than waiting for markets to open.
Despite the benefits, traders are wary of the funding rates, which can be unpredictable and difficult to hedge. A trader explained that the funding rate is like an interest charge that accumulates over time, and it can become a significant burden if not managed properly.
The traders also discussed the issue of liquidations, which can occur when a trader's position is forcibly closed due to margin shortage. While this is a risk inherent to trading, the traders believe that the funding rate is a more pressing concern. The funding rate can be volatile and unpredictable, making it challenging for traders to accurately price and hedge their positions. In fact, one trader noted that the funding rate can be 'unquantifiable at the point of trade and unhedgeable afterwards.' The traders also touched on the concept of 'perpification,' where various assets are being traded as perpetual futures, allowing for more efficient price discovery and trading.
This trend is expected to continue, with more assets being traded as perps in the future. However, the traders cautioned that the funding rate exposure remains a significant risk, and it is essential for traders to understand and manage this risk effectively.
In conclusion, perpetual futures have democratized access to futures trading, offering benefits such as deep liquidity, low fees, and efficient margin usage. However, they also come with unique challenges, including funding rates and liquidation risks. As the market continues to evolve, it is crucial for traders to be aware of these risks and develop strategies to manage them effectively.