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. Unlike standard futures, perps have no expiration date, making them a unique and popular choice among traders. For altcoin traders, perps are often the only viable option for derivatives trading, as dated futures for these assets are typically illiquid.
Spot markets are also not a viable option for short-term traders. CoinDesk spoke with traders who have thrived in the perps market to understand what makes them different from other derivatives and how they cater to the needs of both institutional and retail traders. The traders unanimously agreed that perps offer deep liquidity, low trading fees, and high margin efficiency, making them an attractive choice.
However, they also expressed concerns about funding rates, which are recurring costs associated with keeping positions open. Funding rates can add up over time and are a major 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, as they offer better liquidity and lower costs compared to dated futures. Kenneth Ong, an independent trader, echoed this sentiment, stating that perps provide better fills, lower fees, and the ability to run both long and short positions simultaneously. Both traders emphasized that margin efficiency is the primary draw to perps, as they require only a fraction of the position's value as collateral, allowing traders to manage risk efficiently across different venues and tokens. Perps have also changed the way price discovery occurs, as they allow for 24/7 trading, unlike traditional markets.
This has led to a shift in price discovery, with perps reacting to news and events in real-time, rather than waiting for traditional market hours. However, perps also come with unique challenges, such as funding rates, which can be a significant burden for traders. 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 makes it difficult for traders to quantify and hedge their exposure.
The funding rate can become a significant expense, especially for traders who hold positions for extended periods. 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 recent bear market has also highlighted the risks associated with perps, particularly the socialization of losses on exchanges.
However, Krenn argued that this is not a problem with perps themselves, but rather with the crypto exchange margin model. He emphasized that the key distinction is not between perpetual and dated futures, but rather between facing a proper clearing house with a mutualized default fund or an exchange that socializes losses onto winners. Krenn also offered an interesting insight into the asymmetry of perp risk, stating that being long is the structurally safer side.
His logic is that positive funding is easy to arbitrage away, whereas negative funding is more difficult to compress. This asymmetry is often not priced correctly in risk models, leading to unexpected outcomes. In conclusion, perps have democratized futures trading by providing access, cost, and margin efficiency, but they also come with unique challenges, such as funding rate exposure.
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.'