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. Perps operate similarly to standard futures but without an expiration date, making them a popular choice among traders. For altcoin traders, perps are often the only viable option for derivatives trading due to the illiquidity of dated futures and spot markets. CoinDesk spoke with traders who have thrived in the perpetual futures market to understand what sets perps apart from other derivatives and how they cater to the needs of both institutional and retail traders. The traders unanimously praised perps for their deep liquidity, low trading fees, and high margin efficiency. However, they also expressed concerns over funding rates, which can add up over time and negatively impact trading profits. One trader, Lucas Krenn, noted that perps are the foundation of his firm's trading activities, particularly for altcoins with limited dated futures liquidity. Another trader, Kenneth Ong, highlighted the benefits of perps for retail traders, including better fills, 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 traders to manage risk efficiently across multiple venues and tokens. The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than just during market hours. Traders have observed that perps are becoming increasingly popular, with some predicting that they will continue to gain momentum in the coming years. Despite the benefits of perps, traders are wary of the funding rate, which can be volatile and difficult to quantify. Krenn noted that the funding rate is a greater concern than liquidations, as it can be unquantifiable and unhedgeable. Ong also expressed concerns over the funding rate, stating that it can potentially balloon to the point where a profitable trade becomes unprofitable. The traders also discussed the myth of the safe trade, highlighting that even profitable positions can be force-closed due to exchange margin models. Krenn argued that the problem lies not with perps but with the exchange's margin model and insurance fund. He also pointed out that the distinction between perpetual and dated futures is not as important as the presence of a proper clearing house with a mutualized default fund. Krenn offered an interesting insight into the asymmetry of perp risk, noting that being long is structurally safer due to the ease of arbitraging away positive funding. However, when the funding rate is negative, the arbitrage is more difficult, and the gap between perp and spot prices can persist. This asymmetry is often overlooked in risk models, and Krenn cited an example of a lending protocol's token, where funding rates became extremely negative due to a small and concentrated float. In conclusion, perps have democratized futures trading by addressing issues of access, cost, and margin efficiency. However, they also come with unique challenges, particularly the volatile funding-rate exposure that cannot be quantified or hedged. As Krenn noted, the whole market is carrying an interest rate exposure that it cannot price or hedge, making funding a tax that everyone pays for easy access to this leveraged market.