When discussing cryptocurrency trading with experienced traders, the conversation often revolves around perpetual futures, or 'perps' - a type of derivatives contract that enables 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. However, they also come with unique challenges, particularly regarding funding rates and liquidity.
To better understand the benefits and drawbacks of perps, we spoke with traders who have thrived in this market, including Lucas Krenn, a derivatives trader at STS Digital, and Kenneth Ong, an independent trader with extensive experience in perps. Both traders emphasized the importance of perps in the crypto market, citing their deep liquidity, low trading fees, and efficient margin usage. Nevertheless, they also expressed concerns about the funding rates associated with perps, which can be a significant expense for traders.
The funding rate is essentially an interest charge that accrues over time, and it can be difficult to predict and manage. According to Krenn, the funding rate is a more significant concern than liquidations, which are often cited as a major risk associated with perps. Ong also noted that the funding rate can be a substantial burden, particularly for traders who hold positions for extended periods.
Another key advantage of perps is their ability to provide price discovery, allowing traders to react to market news and events in real-time. This is particularly important in the crypto market, where news and events can occur at any time, regardless of traditional market hours. The always-on nature of perps enables traders to respond quickly to changing market conditions, making them an essential tool for many traders.
Despite the benefits of perps, there are also potential drawbacks to consider. One of the primary concerns is the risk of liquidations, which can occur when a trader's position is forcibly closed due to a margin shortage.
However, Krenn argued that this is not a problem with perps themselves, but rather with the margin models used by crypto exchanges. He noted that dated futures on the same venues are subject to the same risks and challenges. In conclusion, perpetual futures are a complex and multifaceted financial instrument that offers both benefits and drawbacks.
While they provide traders with efficient access to the crypto market, they also come with unique challenges, particularly regarding funding rates and liquidity. As the crypto market continues to evolve, it is essential for traders to carefully consider these factors and develop strategies to manage their risks effectively.