When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' often comes up. These derivatives contracts allow traders to control large positions with minimal capital.
Unlike standard futures, perps have no expiration 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 coins are typically illiquid.
Spot markets are also less desirable for short-term trading. Traders praise perps for their deep liquidity, low trading fees, and high margin efficiency, which enables them to manage risk effectively. However, funding rates, a recurring cost for maintaining open positions, are a concern. This interest charge accrues over time and can add up significantly.
Traders argue that perps are not a choice, but a necessity, due to the lack of liquidity in dated futures. Lucas Krenn, a derivatives trader, notes that perps are the primary tool for crypto-native firms, as dated futures are often too illiquid.
Kenneth Ong, an independent trader, highlights the advantages of perps for retail traders, including better fills, lower fees, and the ability to run both long and short positions simultaneously. Both traders emphasize the importance of margin efficiency in perps, which allows for greater trading exposure with minimal capital. The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than just during market hours.
Traders see perps as a powerful instrument that will continue to gain momentum in the coming years, with the potential to replace dated futures altogether. However, they also caution about the risks associated with funding rates, which can be unpredictable and difficult to hedge. The lack of a built-in mechanism to lock in funding rates exposes traders to floating rates, making it challenging to quantify and manage risk.
As the crypto market continues to evolve, traders must navigate the unique challenges and opportunities presented by perps, including the volatile funding-rate exposure that comes with them.