The Pros and Cons of Perpetual Futures in Crypto Trading

When discussing crypto trading with experienced traders, perpetual futures, also known as 'perps,' are often the first topic that comes up. These derivatives contracts enable 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 due to the illiquidity of dated futures and the spot market. 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 use, which allows for greater trading exposure with less capital. However, they also expressed concerns about the funding rates, a recurring cost associated with keeping positions open. This interest charge can add up over time and is a significant expense for traders. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the primary tool for crypto-native firms due to the lack of liquidity in dated futures. 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 hold both long and short positions simultaneously. Both traders emphasized the importance of margin efficiency in perps, which enables traders to manage risk across different venues and tokens. The perpetual nature of perps has also changed the way price discovery occurs, with news and events driving price movements at any time, rather than just during market hours. Ong noted that during the Iran conflict, tokenized oil trading on Hyperliquid saw a significant surge in volume, with the 'official' market being closed. Krenn sees this mechanism playing out in perps tied to other traditional assets, such as equities. Despite the benefits of perps, traders are wary of the funding rate, which can be a significant burden if not managed properly. A dated futures contract provides a clear interest rate, whereas a perpetual futures contract has a funding rate that changes over time and is typically charged every eight hours. This exposes traders to a floating rate, making it difficult to quantify and hedge. The funding rate can potentially balloon to the point where a profitable trade becomes unprofitable. The traders also discussed the myth of the safe trade, citing the example of the Oct. 10 crash, where exchanges socialized losses to protect their systems, resulting in the liquidation of both losing and profitable positions. Krenn argued that the problem lies not with perps but with the crypto exchange margin model. The distinction between perpetual and dated futures is not as significant as the difference between facing a proper clearing house with a mutualized default fund and an exchange that socializes losses onto winners. Krenn also pointed out that being long is structurally safer due to the ease of arbitraging away positive funding. However, when the funding rate is negative, the arbitrage is more complex, and the gap between perp and spot prices can persist. This asymmetry is often overlooked in risk models, and funding rates can remain extremely high or low for extended periods. In conclusion, perps have democratized futures trading by solving issues of access, cost, and margin efficiency. Nevertheless, they come with unique challenges, particularly the volatile funding-rate exposure that cannot be quantified or hedged. As Krenn noted, until a liquid dated curve emerges in crypto, the market will carry an interest rate exposure that it cannot price or hedge.