When discussing crypto trading with experienced traders, the conversation often revolves around perpetual futures, or 'perps' – a type of derivative contract that enables traders to control large positions with minimal capital. Unlike traditional 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 contracts for these assets tend to be illiquid.
CoinDesk spoke with traders who have thrived in the perps market to understand what sets them 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 efficient margin usage, which allows for greater trading exposure with less collateral. However, they also expressed concerns over the funding rates associated with perps, which can add up over time and eat into trading profits. So, why do traders prefer perps?
According to Lucas Krenn, a derivatives trader at STS Digital, perps are the backbone of their trading operations. 'Outside of bitcoin and ether, dated futures liquidity is virtually non-existent,' Krenn explained. 'Perps are not just one tool among many; for a crypto-native firm, they are the primary tool.' Krenn attributed the lack of popularity of dated futures to the costs associated with replacing expiring contracts, which can be costly and inefficient. In contrast, perps offer a more liquid and efficient way to trade, with better fills and lower fees.
Kenneth Ong, an independent trader, shared a similar perspective, highlighting the benefits of perps for retail traders. Ong noted that perps provide better execution, lower fees, and the ability to hedge positions, making them an attractive option for traders. Both Krenn and Ong emphasized the importance of margin efficiency in perps, which allows traders to manage risk more effectively across different venues and tokens. Perps have also changed the way price discovery occurs, with trading happening around the clock, rather than just during traditional market hours.
Ong recalled an instance during the Iran conflict, where tokenized oil trading on Hyperliquid saw a significant surge in volume, with much of the price discovery happening on perps while traditional markets were closed. Krenn sees perps as a powerful instrument that will continue to gain traction in the coming years, with the potential to disrupt traditional assets like equities and commodities.
However, both traders cautioned about the risks associated with perps, particularly the funding rates, which can be unpredictable and costly. A funding rate is essentially an interest charge that accrues over time, and it can be a significant burden for traders who hold positions for extended periods.
Krenn described the funding rate as 'unquantifiable' and 'unhedgeable,' making it a unique pain point for perps traders. Ong was more blunt, warning that the funding rate can 'potentially balloon to the point where a profitable trade loses money.' The traders also addressed the criticism that perps faced during the October 10 crash, which triggered widespread deleveraging and liquidations. Krenn argued that the issue was not with perps themselves, but rather with the crypto exchange margin model, which socializes losses onto winners.
He emphasized that the distinction between perpetual and dated futures is not the key issue, but rather the presence of a proper clearing house with a mutualized default fund. Krenn offered an interesting insight into the asymmetry of perp risk, suggesting that being long is actually the structurally safer side. He explained that positive funding rates can be easily arbitraged away, but negative funding rates can persist, making it more difficult for traders to short the underlying token.
This asymmetry can lead to funding rates staying extremely negative for extended periods, making it a significant concern for traders. In conclusion, perps have democratized futures trading by providing access, cost efficiency, and margin efficiency, but they also come with unique challenges, particularly the 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.'