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

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, and they have become a staple in the crypto market. Unlike standard futures, perps do not have an expiry date, making them a 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 not a viable option for traders who do not plan to hold onto their assets long-term. To better understand the appeal of perps, CoinDesk spoke with traders who have found success in the perpetual futures market. They explained that perps offer several advantages, including deep liquidity, low trading fees, and efficient margin use. However, traders also expressed concerns over funding rates, which can add up quickly and eat into profits. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the 'plumbing underneath everything' his firm does. Outside of bitcoin and ether, dated futures are often too illiquid to be useful, making perps the go-to choice for many traders. Kenneth Ong, an independent trader, echoed this sentiment, noting that perps offer better fills, lower fees, and the ability to run both long and short positions simultaneously. One of the key advantages of perps is their ability to provide price discovery around the clock. Because perps are always 'on,' traders can react to news and events as they happen, rather than waiting for traditional markets to open. This has led to a shift in how traders approach the market, with many now focusing on perps as their primary trading vehicle. Despite their popularity, perps are not without their drawbacks. Funding rates, which are essentially interest charges on open positions, can be a significant burden for traders. These rates can fluctuate over time and are typically charged every eight hours, making it difficult for traders to predict their costs. Krenn and Ong both expressed concerns over funding rates, noting that they can quickly add up and eat into profits. In fact, Ong stated that funding rates can be so high that they can turn a profitable trade into a losing one. The issue of funding rates is further complicated by the fact that they are difficult to quantify and hedge. As Krenn noted, 'It is unquantifiable at the point of trade and unhedgeable afterwards.' This has led some traders to view funding rates as a 'tax' on their trading activities. Another issue with perps is the risk of liquidations, which can occur when a trader's position is forcefully closed due to a margin shortage. This can happen even if the trader is profitable, as was seen during the October 10 crash last year. However, Krenn argued that this is not a problem with perps themselves, but rather with the crypto exchange margin model. In his view, the issue is not with perps versus dated futures, but rather with the lack of a proper clearing house and mutualized default fund. Despite these challenges, perps are likely to continue playing a major role in the crypto market. 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.' In the meantime, traders will need to be aware of the potential risks and costs associated with perps, including funding rates and liquidations. By understanding these factors, traders can make more informed decisions and navigate the complex world of perpetual futures.