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, and their popularity stems from the absence of expiry dates, unlike traditional futures contracts. For traders of alternative cryptocurrencies, perps often represent the only viable option for derivatives trading, as dated futures contracts for these assets are typically illiquid, and the spot market is often an afterthought for those not planning to hold onto their assets long-term.
CoinDesk spoke with traders who have thrived in the perpetual futures market to gain insight into what sets perps apart from other derivatives, how they cater to the needs of both institutional and retail traders, and the associated costs of perps trading. The consensus among traders is that perps offer deep liquidity, low trading fees, and efficient margin usage, making them an attractive option. However, traders also expressed concerns over funding rates, which are recurring costs associated with keeping positions open. These rates can add up over time and are a significant consideration for traders.
So, why do traders flock to perps? According to Lucas Krenn, a derivatives trader at market-making firm STS Digital, perps are the backbone of his firm's operations, particularly for assets outside of bitcoin and ether, where dated futures contracts are often too illiquid to be useful.
Kenneth Ong, an independent trader, echoed this sentiment, highlighting the benefits of perps for retail traders, including better execution prices, lower fees, and the ability to hold both long and short positions simultaneously. Both traders emphasized the importance of margin efficiency in perps, which allows for greater trading exposure with minimal capital.
The perpetual nature of perps has also shifted the dynamics of price discovery, enabling traders to react to news and events in real-time, rather than being limited to traditional market hours. Nevertheless, traders are wary of the funding rate, which can be a significant burden, especially for long-term positions. Unlike dated futures contracts, which have a fixed interest rate, perps have a funding rate that changes over time and can be difficult to quantify and hedge.
As Krenn noted, 'It is unquantifiable at the point of trade and unhedgeable afterwards.' Ong was more blunt, stating that 'funding's not just some tiny fee you can ignore. It's not. If you hold positions for long periods, it can potentially balloon to the point where a profitable trade loses money.' The issue of funding rates is further complicated by the lack of a liquid dated curve in crypto, making it challenging for traders to price and hedge their interest rate exposure.
In conclusion, while perps have democratized access to futures trading and offer several benefits, they also come with unique challenges, particularly with regards to funding rate exposure. As the crypto market continues to evolve, it is essential for traders to carefully consider these factors and develop strategies to mitigate the associated risks.