The Pros and Cons of Perpetual Futures in Crypto Trading

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, similar to standard futures but without an expiration date. For traders of alternative cryptocurrencies, perps may be the only viable option for derivatives trading, as dated futures contracts for these assets are often illiquid. Recently, CoinDesk spoke with traders who have thrived in the perpetual futures market to gain insight into what makes perps unique, how they cater to the needs of both institutional and retail traders, and the associated costs. The traders' responses were consistent: they appreciate perps for their deep liquidity, low trading fees, and efficient margin usage, which enables them to achieve significant trading exposure with minimal collateral. However, they also expressed concerns about funding rates, a recurring cost for maintaining open positions. Funding rates can be thought of as an interest charge that accumulates over time, and traders are worried about the potential impact on their profits. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the primary tool for crypto-native firms, as they offer the necessary liquidity and efficiency. Krenn explained that dated futures contracts are often illiquid, making them less desirable, and that the costs associated with replacing these contracts at expiration are a significant drawback. Kenneth Ong, an independent trader, shared a similar perspective, highlighting the benefits of perps for retail traders, including better execution prices, lower fees, and the ability to hold both long and short positions simultaneously. Ong noted that the hedge mode in perps allows traders to maintain separate long and short positions on the same token, which is not possible on regulated platforms like the CME. Both Krenn and Ong emphasized the importance of margin efficiency in perps, which enables traders to manage risk effectively across multiple venues and tokens. Because perps require only a fraction of the position's value as collateral, traders can split their capital across various exchanges and still maintain meaningful positions. The perpetual nature of perps has also shifted price discovery to a 24/7 process, with traders reacting to news and events as they happen, rather than only during traditional market hours. Ong recalled an instance during the Iran conflict, where tokenized oil trading on Hyperliquid saw a significant surge in volume over a weekend, while traditional markets were closed. Krenn sees this mechanism playing out in perps tied to other traditional assets, such as equities, where building a proper tokenized product can be challenging. Instead, perps that reference the price of these assets can provide a more efficient and accessible way to trade. However, traders also warned about the risks associated with perps, particularly the funding rate, which can be volatile and difficult to quantify. A dated futures contract provides a clear interest rate from the outset, whereas a perpetual futures contract has a funding rate that changes over time, typically charged every eight hours. This exposes traders to a floating rate while holding the position, with no built-in mechanism to lock it in. Krenn and Ong both expressed concerns about the funding rate, with Ong noting that it can potentially balloon to the point where a profitable trade becomes unprofitable. The traders also discussed the concept of 'perpification' of various assets, where perps become the primary venue for trading, and how this can lead to increased liquidity and efficiency. However, they also cautioned about the risks of liquidations and the importance of understanding the funding rate. In conclusion, perps have democratized futures trading by providing access, cost efficiency, and margin efficiency, but they also come with unique challenges, such as volatile funding-rate exposure. As Krenn put it, 'Until there is a liquid dated curve in crypto, the whole market is carrying an interest rate exposure it cannot price and cannot hedge.'