The Double-Edged Sword of Perpetual Futures: Benefits and Drawbacks

When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps', inevitably comes up. These derivatives contracts allow traders to control large positions with minimal capital, offering a key advantage over traditional futures: no expiry date. For traders of alternative cryptocurrencies, perps are often the only viable option for derivatives trading, as dated futures contracts for these assets are typically illiquid. In contrast, spot markets are often an afterthought for traders who don't plan to hold their positions long-term. To better understand the appeal of perps, CoinDesk spoke with traders who have thrived in the perpetual futures market. Their responses highlighted the deep liquidity, low trading fees, and efficient margin usage of perps as major drawcards. However, traders also expressed concerns about the funding rates associated with perps, which can add up over time and eat into profits. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the 'plumbing underneath everything' his firm does. Outside of bitcoin and ether, dated futures contracts are often too illiquid to be useful, making perps the go-to tool for crypto-native firms. Kenneth Ong, an independent trader, agrees, citing the better fills, lower fees, and ability to run both long and short positions simultaneously as major advantages of perps. Both traders emphasize the importance of margin efficiency in perps, which allows them to manage risk across multiple venues and tokens with minimal capital. The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than just during market hours. This has led to increased trading activity in perps, particularly during times of high market volatility. However, the funding rates associated with perps can be a major concern for traders. Unlike dated futures contracts, which have a fixed interest rate, perps have a funding rate that changes over time and is typically charged every eight hours. This can make it difficult for traders to quantify and hedge their exposure, particularly if they hold positions for extended periods. As Krenn notes, 'It is unquantifiable at the point of trade and unhedgeable afterwards.' Ong is more blunt, stating that 'funding's not just some tiny fee you can ignore. It's not. If you hold positions for long periods, it can potentially balloon to the point where a profitable trade loses money.' Despite these concerns, perps remain a popular choice among traders. As Krenn puts 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.' In the meantime, funding rates are the 'tax' that everyone pays for easy access to this leveraged market.