When discussing crypto trading with experienced traders, perpetual futures, also known as 'perps', are a key topic of conversation. These derivatives contracts allow traders to control large positions with minimal capital. Unlike standard futures, perps do not have an expiry date, making them an attractive option for traders. For altcoin traders, perps are often the only viable derivatives market available, as dated futures for these assets are typically illiquid.
CoinDesk spoke with traders who have thrived in the perps market to understand what sets them apart from other derivatives 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, which enables them to manage risk effectively. However, they also expressed concerns about the funding rates associated with perps, which can add up over time.
Funding rates are essentially interest charges that accrue as long as a position is held. To understand why perps have become so popular, with daily volumes exceeding $200 billion, traders point to the necessity of using them. Lucas Krenn, a derivatives trader, explained that perps are the primary tool for crypto-native firms, as dated futures lack liquidity outside of bitcoin and ether.
Kenneth Ong, an independent trader, highlighted the benefits of perps for retail traders, including better order execution, lower fees, and the ability to hold both long and short positions simultaneously. Both traders emphasized the importance of margin efficiency in perps, which allows them to manage risk across multiple venues and tokens. The perpetual nature of perps has also changed the way price discovery occurs, with traders reacting to news and events outside of traditional market hours. While perps offer many advantages, they also come with unique challenges, such as the funding rate, which can be difficult to quantify and hedge.
Traders warn that ignoring funding rates can lead to significant losses, even on profitable trades. The issue of funding rates is not unique to perps, but rather a problem with the crypto exchange margin model. Krenn noted that the key distinction is not between perpetual and dated futures, but rather between exchanges with proper clearing houses and mutualized default funds, and those that socialize losses onto winners.
In conclusion, perps have democratized futures trading by providing access, reducing costs, and increasing margin efficiency. However, they also introduce unique pain points, such as volatile funding-rate exposure, which can be challenging to quantify and hedge.