The Double-Edged Sword of Perpetual Futures: Weighing the Pros and Cons

When discussing cryptocurrency 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 do not have an 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 assets are typically illiquid. The spot market is also less appealing for traders who do not plan to hold onto their assets long-term. To understand the appeal of perps, CoinDesk spoke with traders who have found success in the perpetual futures market. They highlighted the deep liquidity, low trading fees, and high margin efficiency of perps as major advantages. However, they also expressed concerns about the funding rates associated with perps. Funding rates are recurring costs for keeping positions open and can add up over time. Traders are drawn to perps due to their liquidity and low fees. According to Lucas Krenn, a derivatives trader at STS Digital, perps are the primary tool for crypto-native firms, as dated futures lack liquidity outside of bitcoin and ether. Kenneth Ong, an independent trader, also prefers perps for their better fills, lower fees, and ability to run both long and short positions simultaneously via hedge mode. Both traders emphasize the importance of margin efficiency in perps, which allows for greater trading exposure with less capital. The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than just during market hours. This has led to increased trading activity in perps, even during times when traditional markets are closed. Despite the benefits of perps, traders are wary of the funding rates, which can be volatile and difficult to predict. Krenn and Ong both expressed concerns about the funding rate, citing its potential to become a significant burden for traders. The funding rate is typically charged every eight hours and can change over time, leaving traders exposed to floating rates. This can be particularly problematic for traders who hold positions for extended periods. In addition to the funding rate, traders also face the risk of liquidations, which can occur when the market moves against them. The October 10 crash last year highlighted the risks associated with perps, as exchanges socialized losses to protect their systems, resulting in widespread deleveraging. However, Krenn argues that the problem lies not with perps themselves, but with the margin models used by crypto exchanges. He believes that the distinction between perpetual and dated futures is not as relevant as the difference between exchanges with proper clearing houses and those that socialize losses onto winners. Krenn also points out that being long is often the structurally safer side, as positive funding can be easily arbitraged away. In contrast, negative funding rates can persist for extended periods, making it difficult for traders to short the underlying token. This asymmetry can lead to significant risks for traders, particularly those on the short side. In conclusion, while perps have democratized futures trading by providing access, low costs, and high margin efficiency, they also come with unique challenges, such as volatile funding-rate exposure. As Krenn notes, until a liquid dated curve emerges in crypto, the market will continue to carry an interest rate exposure that cannot be priced or hedged.