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 do not have an expiration date, making them a unique and appealing option for traders.
For altcoin traders, perps are often the only viable derivatives option, as dated futures for these assets are typically illiquid. In contrast, spot markets are often an afterthought for traders who do not plan to hold their positions long-term. To better understand the appeal of perps, we spoke with traders who have thrived in this market. They cited the deep liquidity, low fees, and efficient margin usage as key advantages.
However, they also expressed concerns over funding rates, which can add up over time. 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 dated futures liquidity is often too thin to be useful. Krenn noted that the costs associated with replacing dated futures contracts at expiration make them less efficient than perps.
Another trader, Kenneth Ong, highlighted the benefits of perps for retail traders, including better fills, lower fees, and the ability to run 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. The always-on nature of perps has also shifted the dynamics of price discovery, allowing traders to react to news and market developments in real-time. However, traders also warned about the risks associated with perps, particularly the funding rate, which can be volatile and difficult to quantify.
As Krenn noted, 'It is unquantifiable at the point of trade and unhedgeable afterwards.' Ong also expressed concerns over the funding rate, stating that it can 'potentially balloon to the point where a profitable trade loses money.' Despite these risks, traders believe that perps will continue to gain momentum in the coming years, particularly as tokenized commodities and equities become more prevalent. As Ong noted, 'It kills one of the last reasons to bother with dated futures at all.' Ultimately, perps have democratized futures trading by providing access to a leveraged market, but they also introduce unique challenges, such as volatile 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.'