When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' inevitably come up as a key topic. These derivatives contracts allow traders to control large positions with minimal capital. Unlike standard futures, perps have no expiration date, making them a unique and attractive option for traders.
For altcoin traders, perps are often the only viable derivatives market, as dated futures for these coins are typically illiquid, and the spot market is less relevant for those not planning to hold long-term. CoinDesk spoke with traders who have thrived in the perpetual futures market to understand what sets perps apart, how they cater to both institutional and retail traders, and the costs associated with perps trading. The consensus among traders is that perps offer deep liquidity, low trading fees, and high margin efficiency, making them an essential tool for managing risk.
However, traders also highlighted the funding rate as a significant concern. The funding rate is a recurring cost for maintaining open positions and can add up over time. Lucas Krenn, a derivatives trader at STS Digital, and Kenneth Ong, an independent trader, shared their insights on the benefits and drawbacks of perps.
Krenn noted that perps are the primary tool for crypto-native firms, as dated futures liquidity is thin outside of bitcoin and ether. Ong, who has most of his trading activity in perps, explained that perps offer better fills, lower fees, and the ability to run both long and short positions simultaneously via hedge mode. Both traders emphasized that margin efficiency is a significant draw to perps, as they require only a fraction of a position's value as collateral, allowing for more efficient risk management across different venues and tokens.
The always-on nature of perps has also shifted price discovery to occur around the clock, rather than just during market hours. However, traders are concerned about the funding rate, which can be volatile and difficult to quantify. Krenn and Ong warned that the funding rate can become a burden if the market doesn't move as expected, and it can potentially turn a profitable trade into a loss.
The funding rate is typically charged every eight hours and can be a significant expense for traders. Despite the benefits of perps, traders are cautious about the risks associated with these contracts. The October 10 crash last year, which triggered widespread deleveraging, highlighted the potential risks of perps.
However, Krenn argued that the problem was not with perps themselves, but rather with the crypto exchange margin model. He noted that dated futures on the same venues face the same issues with insurance funds and deleveraging queues. Krenn also pointed out that the distinction between perpetual and dated futures is not as relevant as the difference between facing a proper clearing house with a mutualized default fund or an exchange that socializes losses onto winners.
In conclusion, perps have democratized futures trading by providing access, cost efficiency, and margin efficiency, but they also come with unique challenges, such as 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.'