The Double-Edged Sword of Perpetual Futures: Insights from Crypto Traders

When discussing crypto trading with experienced traders, perpetual futures, or '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 unique and attractive option for traders. For altcoin traders, perps are often the only viable avenue for derivatives trading, as dated futures contracts 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. However, they also expressed concerns over funding rates, which can add up over time and impact trading costs. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the foundation of his firm's trading activities, particularly for assets outside of bitcoin and ether. Krenn noted that dated futures contracts for these assets are often too illiquid to be useful, making perps the go-to option. Kenneth Ong, an independent trader, shared a similar perspective, highlighting the benefits of perps for retail traders, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Ong also emphasized the importance of margin efficiency, which allows traders to manage risk across multiple venues and tokens with minimal capital. The perpetual nature of perps has also changed the way price discovery occurs, with traders reacting to news and market developments in real-time, rather than waiting for traditional market hours. This has led to increased liquidity and more efficient price discovery, particularly during times of high market volatility. However, perps also come with unique challenges, such as funding rates, which can be difficult to quantify and hedge. Krenn and Ong both expressed concerns over funding rates, which can become a significant burden for traders holding positions for extended periods. The traders also discussed the potential risks associated with perps, including liquidations and the socialization of losses on exchanges. Krenn argued that these risks are not inherent to perps but rather a result of the crypto exchange margin model. He emphasized the importance of distinguishing between perpetual and dated futures, as well as the need for a proper clearing house with a mutualized default fund. In conclusion, perps have democratized futures trading by providing access to a leveraged market with low costs and efficient margin usage. However, they also come with unique pain points, such as funding rate exposure, which can be difficult to quantify and hedge. As the crypto market continues to evolve, it is essential for traders to understand the benefits and drawbacks of perps and to develop strategies to mitigate their risks.