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.
Unlike standard futures, perps do not have an expiration date, making them a popular choice among traders. For altcoin traders, perps are often the only viable option for derivatives trading, as dated futures for these assets are typically illiquid. CoinDesk spoke with traders who have thrived in the perps market to understand what makes them unique and how they cater to the needs of both institutional and retail traders.
The traders unanimously praised perps for their deep liquidity, low trading fees, and efficient margin usage. However, they also expressed concerns over funding rates, which can add up over time and negatively impact trading profits. So, why do traders prefer perps?
According to Lucas Krenn, a derivatives trader at STS Digital, perps are the backbone of crypto trading, offering a necessary tool for traders to manage risk and access liquidity. Kenneth Ong, an independent trader, echoed this sentiment, highlighting the benefits of perps for retail traders, including better fills, lower fees, and the ability to run both long and short positions simultaneously.
Both traders emphasized the importance of margin efficiency in perps, which allows traders to manage risk across multiple venues and tokens with minimal capital. The perpetual nature of perps has also shifted price discovery to a 24/7 process, allowing traders to react to news and market developments in real-time. While perps offer many advantages, they also come with unique challenges, particularly with regards to funding rates.
Unlike dated futures, which have a fixed interest rate, perps have a funding rate that changes over time and can be a significant burden for traders. Krenn and Ong warned that funding rates can be unquantifiable and unhedgeable, making them a major concern for traders. The traders also discussed the myth of the 'safe trade,' highlighting the risks of liquidations and the importance of understanding the underlying mechanics of perps.
In conclusion, perps have democratized futures trading by providing access, cost efficiency, and margin efficiency, but they also come with unique pain points, particularly with regards to funding-rate exposure. As Krenn noted, 'Until there is a liquid dated curve in crypto, the whole market is carrying an interest rate exposure it cannot price and cannot hedge.'