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 lack an expiry date. For traders of alternative cryptocurrencies, perps are frequently the only available derivatives option, as dated futures for these assets are often illiquid and the spot market is not a viable option for short-term trading.
CoinDesk spoke with traders who have thrived in the perps market to understand what sets perps apart from other derivatives, how they cater to the needs of both institutional and retail traders, and the costs associated with perps trading. The traders' responses were overwhelmingly positive, citing perps' deep liquidity, low trading fees, and high margin efficiency. However, they also expressed concerns about funding rates, which are recurring costs for maintaining open positions. Funding rates can be thought of as interest charges that accumulate over time, and traders are worried about their potential impact on trading costs.
So, why do traders prefer perps? The answer lies in their necessity, rather than choice. Lucas Krenn, a derivatives trader at STS Digital, noted that perps are the primary tool for crypto-native firms, as dated futures lack liquidity outside of bitcoin and ether. Krenn explained that dated futures are less popular due to the costs associated with replacing them at expiry, which also affects the efficiency of futures-based ETFs.
Perps offer better liquidity, allowing for larger buy and sell orders at stable prices, whereas standard dated futures are often illiquid, making them more susceptible to price swings. Kenneth Ong, an independent trader, shared a similar perspective, highlighting perps' advantages, including better fills, lower fees, and the ability to hold both long and short positions simultaneously via hedge mode.
Ong started trading in the spot market but shifted to perps due to their superior margin efficiency, which enables traders to manage risk more effectively across different venues and tokens. Because perps require only a fraction of the position's value as collateral, traders can split their capital across multiple venues and maintain meaningful positions. The perpetual nature of perps has also changed the dynamics of price discovery, allowing it to occur at any time, rather than only during market hours. Ong experienced this firsthand during the Iran conflict, where tokenized oil trading on Hyperliquid saw a significant surge in volume over a weekend, resulting in price adjustments before traditional markets opened.
Krenn sees this mechanism playing out in perps tied to other traditional assets, such as tokenized equities, which can sidestep the complexities of recreating traditional share ownership on-chain. Both traders believe that the 'perpification' of various assets will gain momentum in the coming years, with Ong noting that tokenized oil trading is a preview of what's to come for other commodities. However, they also warned about the risks associated with perps, particularly the funding rate, which can be a significant burden 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 exposes traders to a floating rate, making it difficult to quantify and hedge the risk.
Krenn and Ong emphasized that the funding rate is not a minor concern, as it can potentially turn a profitable trade into a loss if the market doesn't move as expected. The traders also addressed the criticism that perps faced during the October 10 crash, which triggered widespread deleveraging across both losing and profitable positions. Krenn argued that the issue was not with perps themselves but rather with the crypto exchange margin model, which socializes losses onto winners.
He noted that dated futures on the same venues face the same problems, and the key distinction lies in whether traders are facing a proper clearing house with a mutualized default fund or an exchange that socializes losses. Krenn offered an interesting insight into the risk profile of perps, suggesting that being long is the structurally safer side. His logic is that positive funding is easy to arbitrage away, but negative funding can persist due to constraints on shorting the underlying token.
This creates an asymmetry that few risk models account for, where the long side has a bounded cost and unbounded upside, while the short side has a bounded upside and unbounded cost. In conclusion, perps have democratized futures trading by addressing issues of access, cost, and margin efficiency, but they also come with unique challenges, such as volatile funding-rate exposure.
As Krenn put it, until a liquid dated curve emerges in crypto, the market will continue to carry an interest rate exposure that cannot be priced or hedged, making funding a 'tax' that everyone pays for access to this leveraged market.