The Double-Edged Sword of Perpetual Futures in Crypto Trading

When discussing crypto trading, savvy traders often bring up perpetual futures, or 'perps' - a type of derivative contract that allows traders to control large positions with minimal capital. Unlike traditional futures, perps have no expiration date, making them a popular choice among traders. However, they also come with unique challenges, such as funding rates, which can add up quickly and eat into profits. To better understand the world of perps, we spoke with experienced traders who shared their insights on the benefits and drawbacks of these contracts. According to Lucas Krenn, a derivatives trader at STS Digital, perps are the 'plumbing underneath everything' his firm does, particularly when it comes to trading altcoins. 'Outside of bitcoin and ether, dated futures liquidity is thin to the point of being unusable,' he explained. 'So, perps are not just one tool among several - for a crypto-native firm, they are the tool.' Kenneth Ong, an independent trader, echoed Krenn's sentiments, highlighting the advantages of perps, including better fills, lower fees, and the ability to run both long and short positions simultaneously. However, both traders also expressed concerns over funding rates, which can be volatile and difficult to predict. 'It's unquantifiable at the point of trade and unhedgeable afterwards,' Krenn warned. Ong was more blunt, stating that funding rates 'can potentially balloon to the point where a profitable trade loses money.' Despite these challenges, perps have become an essential part of the crypto trading landscape, offering a level of liquidity and flexibility that traditional futures contracts cannot match. As the market continues to evolve, it's likely that perps will play an increasingly important role in shaping the future of crypto trading.