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 function similarly to standard futures but without an expiry date, making them a unique and attractive option for traders.
For altcoin traders, perps are often the only viable avenue for derivatives trading, as dated futures for these coins are typically illiquid, and the spot market is less relevant for those not planning to hold long-term. CoinDesk spoke with traders who have thrived in the perpetual futures market to understand what sets perps apart from other derivatives, how they efficiently meet the needs of both institutional and retail traders, and the costs associated with perps trading.
The traders' responses were clear and unanimous: everyone appreciates perps due to their deep liquidity, low trading fees, and efficient margin usage, which refers to the amount of trading exposure achievable per unit of collateral posted. However, trading fees are not the only expenses traders face; there's also a recurring cost for maintaining open positions, known as funding rates, which can accumulate over time. Traders are concerned about the impact of these funding rates, especially since they can significantly add up. The reason perps are so popular, with daily volumes exceeding $200 billion, is not by choice but by necessity, according to Lucas Krenn, a derivatives trader at STS Digital.
For crypto-native firms, perps are not just one tool among many; they are the primary tool, especially outside of bitcoin and ether, where dated futures liquidity is scarce. Dated futures are less popular because they require replacement at expiry, a process that incurs costs, making futures-based ETFs less efficient than spot ETFs. Perps offer better liquidity, allowing for large buy and sell orders at stable prices, unlike standard dated futures, which are largely illiquid and can be easily swayed by big orders, leading to slippage.
Kenneth Ong, an independent trader, explained that perps attract retail traders with their better fills, lower fees, and the ability to run both long and short positions simultaneously via hedge mode. This is a significant advantage over regulated venues like CME, where a single account is typically netted by default. Ong and Krenn both emphasized that margin efficiency is the real draw to perps, as they require only a fraction of a position's value as collateral, allowing the same pool of capital to be split across multiple venues and tokens. The always-on nature of perps has shifted price discovery to occur at any time, not just when markets are open.
This was evident during the Iran conflict, where tokenized oil trading on Hyperliquid saw a surge in volume over a weekend, with the 'official' market closed. The perpetual nature of perps sidesteps the need for recreating traditional asset ownership machinery on-chain, making them powerful for those looking to trade rather than invest long-term. Both traders see the 'perpification' of assets gaining momentum, with tokenized oil trading being a preview of what's to come for other commodities. However, they also warn about the funding rate, which can change over time and is typically charged every eight hours, leaving traders exposed to a floating rate with no built-in mechanism to lock it in.
If the market doesn't move as expected, the funding rate can become a significant burden, potentially turning a profitable trade into a loss. The funding rate is unquantifiable at the point of trade and unhedgeable afterwards, making it a cause for concern. The issue of liquidations and the socialization of losses on exchanges during times of crisis, such as the October 10 crash, highlights the risks associated with perps.
However, Krenn argues that the problem lies not with perps but with the crypto exchange margin model. The distinction that matters is not between perpetual and dated futures but whether one is facing a proper clearing house with a mutualized default fund or an exchange that socializes losses onto winners. Krenn also points out an asymmetry in perp risk that inverts common assumptions: being long is structurally safer because positive funding is easy to arbitrage away, but negative funding can persist due to constrained arbitrage, leading to funding rates that can stay extremely negative for long stretches.
This asymmetry, with the long side having a bounded cost and unbounded upside, and the short side having a bounded upside and unbounded cost, is not well-represented in risk models. The example of lending protocol Euler's token illustrates this, where funding on the perp went deeply negative, and shorts were paying significant amounts to longs, with almost nobody able to compress it due to the small and concentrated float.
In conclusion, while perps have democratized futures trading by solving issues of access, cost, and margin efficiency, they are not without unique challenges, particularly the volatile funding-rate exposure that cannot be quantified or hedged. As Krenn noted, until there is a liquid dated curve in crypto, the whole market carries an interest rate exposure it cannot price or hedge, making funding the 'tax' everyone pays for easy access to this leveraged market.