When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic of conversation. These derivatives contracts allow traders to control large positions with minimal capital. Unlike standard futures, perps do not have an expiry date, making them a unique and attractive option for traders. For altcoin traders, perps are often the only viable derivatives market, as dated futures for these assets are typically illiquid.
The spot market, on the other hand, is mostly used for long-term holding. To better understand the perpetual futures market, we spoke with traders who have found success in this space. They highlighted the deep liquidity, low trading fees, and efficient margin usage as key benefits of perps. However, they also expressed concerns about the funding rates, which can add up over time 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' the firm does. Outside of bitcoin and ether, dated futures liquidity is scarce, making perps the go-to option. Krenn noted that dated futures are not popular due to the costs associated with replacing them at expiry, which can be costly and inefficient.
Perps, on the other hand, offer better fills, lower fees, and the ability to run both long and short positions simultaneously. Kenneth Ong, an independent trader, echoed Krenn's sentiments, citing the ability to hold long and short positions on the same token as a major advantage. Ong also highlighted the importance of margin efficiency, which allows traders to manage risk across different venues and tokens. The always-on nature of perps has also shifted price discovery, allowing traders to react to news and events in real-time.
However, this also means that funding rates can become a significant burden, especially for traders who hold positions for extended periods. The funding rate, which is typically charged every eight hours, can be unpredictable and difficult to hedge. As Krenn put it, '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 recent bitcoin bear market has also highlighted the risks associated with perps. On October 10, exchanges socialized losses to protect their systems, resulting in widespread liquidations. However, Krenn argued that this was not a problem with perps themselves, but rather with the crypto exchange margin model. The distinction between perpetual and dated futures is not as important as the type of clearing house and default fund in place.
Krenn also offered an interesting insight into the asymmetry of perp risk, noting that being long is often the structurally safer side. This is because positive funding is easy to arbitrage away, while negative funding can persist for long periods. As the crypto market continues to evolve, it's likely that perps will play an increasingly important role.
However, traders must be aware of the unique pain points associated with these contracts, including the volatile funding-rate exposure. As Krenn put it, 'Until there is a liquid dated curve in crypto, the whole market is carrying an interest rate exposure it cannot price and cannot hedge.'