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. Perps function similarly to standard futures but without an expiry date.
For traders of alternative cryptocurrencies, perps may be the only viable option for derivatives trading due to the illiquidity of dated futures and spot markets. To understand what makes perps unique and how they cater to both institutional and retail traders, insights from thriving perps traders were gathered. The consensus among traders is that perps are attractive due to their deep liquidity, low trading fees, and efficient margin usage, which enables significant trading exposure with minimal collateral.
However, traders also voiced concerns about funding rates, a recurring cost associated with keeping positions open. This interest charge accumulates over time and can substantially add up.
The necessity of perps in crypto trading is underscored by their average daily volume exceeding $200 billion. According to Lucas Krenn, a derivatives trader, perps are not just one tool among many but the primary instrument for crypto-native firms due to the lack of liquidity in dated futures outside of bitcoin and ether. Kenneth Ong, an independent trader, highlighted the advantages of perps for retail traders, including better order execution, lower fees, and the ability to hold both long and short positions simultaneously. Both traders emphasized that margin efficiency is a significant draw to perps, allowing for the management of risk across different venues and tokens with greater leverage than standard futures.
The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than being limited to traditional market hours. This has been observed in the trading of tokenized commodities during significant events. Despite the benefits, traders cautioned about the funding rate, which can become a significant burden if not managed properly. Unlike dated futures contracts, which have a predetermined interest rate, perps have a funding rate that changes over time and is typically charged every eight hours.
This exposes traders to a floating rate that cannot be locked in at the time of the trade. The funding rate can potentially negate the profits of a trade if it becomes too high. The issue of funding rates is further complicated by the lack of a built-in mechanism to hedge against them. The traders noted that while perps have democratized access to futures trading by addressing issues of access, cost, and margin efficiency, they also introduce unique challenges, particularly the volatile funding rate exposure.
In conclusion, perps offer a powerful tool for crypto traders but require a deep understanding of their mechanics and risks, especially regarding funding rates, to navigate them effectively.