When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' inevitably comes up. These derivatives contracts allow traders to control larger positions with less capital. Unlike standard futures, perps do not have an expiration date, making them a unique and attractive option for traders.
For altcoin traders, perps are often the only viable avenue for derivatives trading, as dated futures for these coins are typically illiquid, and the spot market is not a priority for those who don't plan to hold onto their assets long-term. CoinDesk spoke with traders who have found success in the perpetual futures 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 unanimous: perps are favored for their deep liquidity, low trading fees, and efficient margin usage, which enables traders to gain more exposure with less collateral. However, trading fees are not the only expenses traders need to consider. There's also the funding rate, a recurring cost for maintaining open positions, which can add up over time and is a significant concern for traders. So, why do traders prefer perps?
According to Lucas Krenn, a derivatives trader at STS Digital, perps are the foundation of their trading activities, especially for crypto-native firms. Krenn explained that outside of bitcoin and ether, dated futures lack liquidity, making perps the go-to tool for traders. Kenneth Ong, an independent trader with a focus on perps, shared a similar perspective, highlighting the benefits of better fills, lower fees, and the ability to hold both long and short positions simultaneously.
Both traders emphasized that margin efficiency is a significant advantage of perps, allowing them to manage risk more effectively across different venues and tokens. The perpetual nature of perps has also shifted price discovery, enabling traders to react to news and market developments in real-time, rather than being limited to traditional market hours. This has been particularly evident in the trading of tokenized commodities, such as oil, where perps have allowed for more efficient price discovery.
While perps offer many benefits, they also come with unique challenges, particularly the funding rate, which can be volatile and difficult to quantify. Traders are exposed to this floating rate while holding positions, and it can become a significant burden if the market doesn't move as expected. Krenn and Ong both expressed concerns about the funding rate, with Ong noting that it can potentially turn a profitable trade into a loss if held for an extended period. The funding rate is not the only issue with perps; the lack of a built-in mechanism to lock in interest rates and the potential for liquidations are also significant concerns.
Despite these challenges, perps are likely to continue gaining momentum, with traders expecting them to spread into new asset classes. As the crypto market evolves, it's essential for traders to understand the benefits and drawbacks of perps and to develop strategies to manage the unique risks associated with these derivatives contracts.