When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' inevitably comes up. These derivatives contracts allow traders to control large positions with minimal capital, similar to standard futures but without an expiry date. For traders of alternative cryptocurrencies, perps are often the only viable option for derivatives trading, as dated futures for these assets are typically illiquid, and the spot market is not a priority for those who don't plan to hold onto their assets long-term. CoinDesk spoke with traders who have thrived in the perpetual futures market to explore what sets perps apart from other derivatives, how they cater to the needs of both institutional and retail traders, and the costs associated with perps trading.
The traders' responses were overwhelmingly positive, citing perps' deep liquidity, low trading fees, and efficient margin usage, which enables traders to gain significant exposure with minimal collateral. However, they also expressed concerns about funding rates, a recurring cost for maintaining open positions.
Funding rates can be thought of as an interest charge that accrues over time, and traders are worried about the potential impact on their profits. So, why do traders prefer perps?
According to Lucas Krenn, a derivatives trader at STS Digital, perps are not just one tool among many, but rather the primary tool for crypto-native firms, given the lack of liquidity in dated futures outside of bitcoin and ether. 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 via hedge mode.
Both traders emphasized the importance of margin efficiency in perps, which allows for greater leverage and more efficient risk management across different venues and tokens. Another significant advantage of perps is their role in price discovery, which can occur at any time, not just during market hours. This was evident during the Iran conflict, when tokenized oil trading on Hyperliquid experienced a surge in volume over a weekend, with the majority of the price reaction happening on crypto and tokenized commodity perps while traditional markets were closed. Krenn and Ong also discussed the potential for perps to gain traction in other asset classes, such as commodities and equities, as they offer a more efficient and accessible way to trade.
However, they also warned about the risks associated with perps, particularly the funding rate, which can be volatile and difficult to quantify. A dated futures contract, on the other hand, provides a clear interest rate from the outset, 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 while holding a position, with no built-in mechanism to lock it in.
As Krenn noted, 'It is unquantifiable at the point of trade and unhedgeable afterwards.' Ong was more blunt, stating, 'That funding's not just some tiny fee you can ignore. It's not. If you hold positions for long periods, it can potentially balloon to the point where a profitable trade loses money.' The traders also addressed the issue of liquidations, which can occur when a trader's margin is insufficient to cover their losses. While this is a risk associated with perps, Krenn argued that it is not a problem inherent to perps themselves, but rather a result of the crypto exchange margin model.
In fact, Krenn believes that being long is the structurally safer side, as positive funding is easy to arbitrage away, whereas negative funding can persist for extended periods due to constrained arbitrage. This asymmetry is often not accounted for in risk models, and it can result in significant losses for traders who are short. In conclusion, while perps have democratized futures trading by providing access, low costs, and efficient margin usage, they are not without unique challenges, particularly the volatile funding-rate exposure that cannot be quantified or hedged.
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.'