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, offering a key advantage over standard futures: they never expire. For traders of alternative cryptocurrencies, perps are frequently the only viable option for derivatives trading, as dated futures contracts for these assets are often illiquid, and the spot market is generally only considered for long-term holdings.
CoinDesk spoke with traders who have thrived in the perpetual futures market to understand what sets perps apart from other derivatives, how they meet the needs of both institutional and retail traders, and the costs associated with perps trading. The traders' responses were clear and largely unanimous: perps are favored due to their deep liquidity, low trading fees, and high margin efficiency, which enables traders to gain significant exposure with minimal collateral. However, traders also expressed concerns about funding rates, a recurring cost for maintaining open positions that can accumulate over time. The reason perps have become so popular, with daily trading volumes exceeding $200 billion, is not a matter of choice but necessity, according to Lucas Krenn, a derivatives trader at market-making firm STS Digital.
Krenn explained that outside of bitcoin and ether, dated futures contracts lack sufficient liquidity, making perps the primary tool for crypto-native firms. Dated futures are less popular because they need to be replaced with new contracts upon expiry, a process that incurs costs, making futures-based ETFs less efficient than spot ETFs.
Kenneth Ong, an independent trader with extensive experience in perps, highlighted the benefits of perpetual futures from a retail trader's perspective, including better fills, lower fees, and the ability to run both long and short positions simultaneously via hedge mode. This feature allows traders to hold bullish and bearish bets on the same token in the same account, treated as separate positions. Ong noted that margin efficiency is the primary draw to perps, as they offer significantly greater leverage than standard futures, enabling efficient risk management across different venues and tokens.
Because perps require only a fraction of a position's value as collateral, traders can split their capital across multiple venues and maintain meaningful positions. The perpetual nature of perps has shifted price discovery to occur around the clock, rather than only during market hours.
Ong recalled an instance during the Iran conflict, where tokenized oil trading on Hyperliquid saw a surge in volume over a weekend, with the 'official' market closed. By the next Monday, a significant portion of the price adjustment had already occurred in the crypto and tokenized commodity perps market. Krenn observed a similar mechanism in perps tied to traditional assets, noting that building tokenized equity products is challenging due to the need to replicate the legal, operational, and regulatory framework of traditional share ownership on-chain.
Perps that reference prices sidestep these complexities, making them appealing for traders. Both traders believe the 'perpification' of various assets will gain momentum, with Ong suggesting that tokenized oil trading is a preview of what's to come for other commodities. Deepening liquidity across commodities and equities could render dated futures obsolete.
However, traders also warned about the funding rate, which can be a significant burden, especially for long-term positions. A dated futures contract provides a clear interest rate at the outset, whereas a perpetual futures contract has a funding rate that changes over time, typically charged every eight hours. This exposes traders to a floating rate with no mechanism to lock it in, making it unquantifiable at the point of trade and unhedgeable afterwards.
Krenn and Ong emphasized that the funding rate is not a minor issue, as it can potentially turn a profitable trade into a loss if held for an extended period. The traders also addressed the myth of the 'safe trade,' referencing the October 10 crash that triggered widespread deleveraging across both losing and profitable positions.
Krenn argued that the problem was not with perps but rather with the crypto exchange margin model, which socializes losses onto winners. He noted that dated futures on the same venues face the same issues, highlighting the importance of proper clearing houses with mutualized default funds. Krenn offered an insightful perspective on perp risk, suggesting that being long is structurally safer due to the ease of arbitraging away positive funding.
However, when the funding rate is negative, arbitrage is more complex, and the gap between perp and spot prices can persist, leading to prolonged periods of extremely negative funding rates. This asymmetry, where the long side has a bounded cost and unbounded upside, while the short side has a bounded upside and unbounded cost, is often overlooked in risk models. Krenn cited the example of lending protocol Euler's token, where a hard run on a listing led to deeply negative funding on the perp, with shorts paying significant amounts to longs, and almost nobody able to compress the spread due to the small and concentrated float.
In conclusion, while perps have democratized futures trading by addressing issues of access, cost, and margin efficiency, they are not without unique challenges, particularly the volatile funding-rate exposure that cannot be quantified or hedged. As Krenn put it, until a liquid dated curve emerges in crypto, the market will carry an interest rate exposure it cannot price or hedge, with funding being the 'tax' everyone pays for easy access to this leveraged market.